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Business & Financial
Robert S. Reichard, Economics Editor

Some Hope Amid Industry Woes

Robert S. Reichard, Economics Editor

E arly second-quarter performance continues to disappoint. But on a rosier note, there are also some signs of better days ahead — with meaningful signs possible by as early as summer or fall, as the economy begins to pick up steam (see details below). One thing is for sure, given the industry’s current financial problems — the improvement will come none too soon. It’s hard to shrug off, for example, such recent news as Guilford Mills’ and Galey & Lord’s decisions to file for Chapter 11 backruptcy court protection. Remember, too, these moves come hard on the heels of last year, when some 124 domestic mills either laid off workers or closed down entirely.

Almost all of these steps can be traced back to a growing financial squeeze. If nothing else, they highlight the need for relief — especially for passage of new legislation calling for longer net-operating-loss carryback periods.

Financing Problems Persist

Further aggravating the financial situation is the industry’s inability to raise prices. Most fabric quotes, for example, remain under year-earlier readings — some by significant amounts.

Behind all this softness: a combination of lackluster ordering, industry overcapacity (operating rates are in the low 70s range) and the downstream pressure put on mills by both apparel manufacturers and retailers. These buyers of mill products are themselves being squeezed by retail apparel quotes that currently average some 4 percent under year-ago levels. And, last but not least, there’s still strong import competition — with quotes on incoming textile and apparel products off by about 1 percent vis-a-vis just one year ago.

An Improving Inventory Picture

But, as noted above, things could be getting a little better over the coming months. For one, the industry’s top-heavy inventory position seems to be shrinking. These lower pipeline stocks make it somewhat more likely that any new orders coming in will stimulate new production. The improvement here is centered in the textile mill area (yarns and fabrics), where inventories have dropped a solid $168 million over the latest reported month. This translates into a meaningful decline in the bellwether stock/sales ratio — from a 1.69 months’ supply down to a 1.65 reading.

To be sure, the stock levels in textile products (carpets, rugs, home furnishings) remain relatively unchanged. But that’s to be expected since both dollar levels and the stock/sales ratio have been relatively low for quite some time now.

Another Plus: Faster Economic Growth

The drop in textile inventories reflects a more general inventory correction — one embracing the entire economy. Credit this to savvy computer technology, which has provided managers with the real-time information to quickly adjust production schedules to earlier increases in stock levels and slower demand. Bottom line: businessmen were able to liquidate stockpiles at a peak rate last year — with the fourth quarter alone showing a record $120 billion tumble.

Another economic fillip has come from extra-large tax refunds. Running better than 25 percent above a year ago (and coming to more than $2,000 per taxpayer), they’ve helped to bolster consumer spending.

Add in other pluses such as record mortgage refinancings, minimal price inflation and low interest rates — and most economists are now more than doubling their first-half 2002 gross-domestic-product (GDP) gain estimates (from 1 to 2 percent to 3 to 4 percent). This, in turn, is bound to have some positive impact on both textile and apparel demands.

What It All Adds Up To

Nor is this upwardly-revised GDP growth forecast the only good omen. Equally important are the textile and apparel industries’ continuing efforts to market a growing number of improved and innovative new products. Particularly noteworthy in this respect are just-introduced oven-baked resin finishes for denims, new antimicrobial fabrics that kill bacteria and new cottons, wools, man-mades and blends that appeal to upscale buyers.

In short, the worst seems over — though again, it should be emphasized that any big spurt is still nowhere in sight. Our revised industry forecast for the last six months of the year, for example, calls for a modest 1- to 2-percent increase in overall mill production totals — a welcome change from the steady tattoo of 2001 textile declines.

April 2002

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