By: ProcurementIQ Analyst, Braden Baseley
Each quarter, ProcurementIQ prepares an update that identifies the most significant recent macroeconomic trends affecting procurement professionals. ProcurementIQ's updates are intended to help these professionals better understand the broader purchasing environment and make strategic buying decisions. This quarter, ProcurementIQ's update focuses on commodity prices, tax cuts and interest rates that can substantially impact business purchases.
After declining for several years, oil prices reached a two-year high in December 2017 following OPEC’s decision to slash production. From 2015 to 2018, the world price of crude oil has been rising at an estimated annualized rate of 2.0%, which has contributed to growth in prices for several fuel markets and downstream transportation markets. Procurement professionals can expect oil prices to continue growing at an annualized rate of 3.0% through 2021, making it imperative for them to lock in prices now.
Prices for metals have also rebounded following a period of decline. For example, world prices for steel, aluminum and copper all reached two-year highs at the end of 2017, pushing up prices for downstream goods like copper pipes and tubes and metal cans. During the three years to 2021, world prices for aluminum and copper are projected to continue growing. Therefore, procurement professionals can shift to alternatives or lock in long-term supply agreements to hedge against these rising metal prices.
- Oil prices have been rising in the three years to 2018, a trend that will continue through 2021.
- Steel, aluminum and copper prices have largely rebounded during the past three years.
- Buyers can enter into long-term supply agreements, shift to alternatives or buy goods in bulk to hedge against fluctuations in commodity prices.
In mid-December, the Republican-led Congress passed the most sweeping tax reformation in over 30 years. The Tax Cuts and Jobs Act slashed the top corporate tax rate from 35.0% to 21.0%, with the expectation that businesses will use these tax savings to increase capital spending, boost employees’ wages and hire more labor. Procurement departments may benefit from stronger cash flows as a result of these tax cuts, affording them greater flexibility when negotiating contracts. At the same time, tax reform may pump too much money into the economy and create greater inflation, meaning that prices for goods and services across the economy may increase substantially, thereby hurting buyers.
- The Tax Cuts and Jobs Act cuts the top corporate tax rate to its lowest level in roughly 80 years.
- Tax cuts may result in larger cash reserves for corporations, giving them greater means to purchase goods and services.
- Higher inflation may be a by-product of tax reform, increasing costs for goods and services.
The Federal Reserve has continued to raise interest rates incrementally. In December 2017, the Federal Open Markets Committee set the current federal funds rate between 1.25% and 1.50%, the highest rate in nearly a decade. The Federal Reserve has indicated it plans to continue raising interest rates steadily during the next few years, even as Jerome Powell takes over as chairman when Janet Yellen’s term expires in early 2018. Overall, rising interest rates will continue to raise borrowing costs, so procurement professionals may benefit from locking in lower rates for equipment financing services and commercial lending services now to hedge against higher interest expenses.
- The cost of borrowing rises as the federal funds rate increases.
- Buyers can lock in fixed lower rate loans now to avoid higher interest expenses in the future.