U.S. GOODS COSTS WON’T RISE AS MUCH AS RAW MATERIALSYS

New York, February 2 (Bloomberg)- Manufacturers in the U.S. will be able to prevent rising raw-material prices from hurting earnings in coming months, according to Norbert Ore, chairman of the Institute for Supply Management’s factory survey.

By combining some price increases with gains in productivity and growing sales, factories will be able keep profits climbing, Ore said in a telephone interview from Atlanta. The ISM’s prices-paid index jumped to 81.5 in January, the highest level in more than two years, reflecting climbing costs for metals, chemicals and even soybean oil, the Tempe, Arizona-based group said today.

“The challenge is going to be to offset the increase in commodity prices through either increased productivity, expanding volumes or price recovery,” said Ore. “You try to work all three of those levers. The net effect on profits, given the volumes we’re looking at and the amount of growth we’re seeing, shouldn’t present a problem in the first quarter”.

ISM’s factory index last month rose to 60.8, signaling manufacturing expanded at the fastest pace in more than six years. The last time its raw-material costs index was as high was in July 2008, the month crude oil reached a record, intraday high of $147.27.

While oil and other commodities are surging, largely due to growth in emerging economies like China, companies have less scope to pass those increases along, said Ore. “No one wants to raise prices to their customers where they will kill demand,” he said.

Earnings gains

Earnings for Standard & Poor’s 500 companies will rise 15 percent this year, according to forecasts of analysts surveyed by Bloomberg News. That would follow growth of 30 percent in 2010, the first full year of recovery from the recession that ended in June 2009.

More than 74 percent of the 204 companies that reported earnings since Jan. 10 topped analysts’ projections, according to data compiled by Bloomberg.

Dallas-based Kimberly-Clark Corp., the maker of Huggies diapers and Viva paper towels, is one company cutting costs as well as raising prices. It plans to exit its remaining pulp- manufacturing operations to help boost earnings after reporting fourth-quarter profit last week that was little changed.

Chief Executive Officer Tom Falk saved $90 million in operating costs during the quarter and raised the prices of consumer-tissue products to soften the impact of price increases for fiber, resin and other raw materials.

More productive

Manufacturers have been among the most adept at cutting labor expenses by boosting efficiency to combat rising raw- material prices. Factory productivity climbed 4 percent from the third quarter of 2009 to the same period last year, according Labor Department data. The comparable figure for all non-farm businesses was 2.5 percent.

Year-over-year gains in productivity for all companies peaked at a 48-year high of 6.3 percent in the first three months of 2010, led by an 8.1 percent jump among factories.

Gains in productivity are a double-edged sword. While they help control costs, they also mean hiring will be slow to recover. Factories boosted payrolls by 10,000 workers in December, the first gain in five months, according to figures from the Labor Department. January data, due Feb. 4, will show a similar gain, according to the median forecast of economists surveyed by Bloomberg.

The ISM’s employment gauge last month reached the highest level since 1973, today’s report showed, indicating manufacturers may be more willing to hire as sales pick up.

Raising prices

Illinois Tool Works Inc. has been among companies offsetting some of the increase in raw materials by raising prices.

“We’re probably going to continue to see, at least in some categories, some ongoing cost increases, which will require further pricing action.” David Speer, chief executive officer of the Glenview, Illinois-based company, said on a Jan. call with analysts.

Some economists aren’t as sanguine manufacturers will be able to push through price increases.

“It’s a headwind for corporate profits and earnings, as it means the cost of production is increasing,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “We’re not dealing with roaring inflation, but there’s a turn in prices”.

Fed view

Instead of being a concern, higher prices may come as a relief to Federal Reserve policy makers. Beside the elevated unemployment rate, the central bank’s main concern has been avoiding deflation, a prolonged and widespread fall in prices that can hurt the economy.

“Measures of underlying inflation are somewhat low, relative” to its long-range target, the Fed said Jan. 26 after its most recent policy meeting.

Even so, Chairman Ben S. Bernanke said Jan. 13 at a forum in Arlington, Virginia, that risk of deflation had “receded considerably”.

ISM’s Ore was more emphatic.

“As far as manufacturers are concerned, deflation is in the rear-view mirror,” he said. “They are much more concerned about the effect of inflation”.

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