Business Quarterly: Large local businesses coping with inflation 

  • Tim Steele, right, CEO of Microspec Corporation in Peterborough on the production floor of the company’s facility off of Route 202. The company produces millions of medical tubing used in picc catheters that bought by medical device companies such as Johnson and Johnson, and used in medical procedures. courtesy of scott merrill

  • CEO and founder of Microspec Corporation, Tim Steele, with his wife Elizabeth Steele. courtesy of scott merrill

For the Monadnock Ledger-Transcript
Published: 7/25/2022 3:31:49 PM

For some larger businesses in the Monadnock region – especially medical supply companies – the effects of inflation, while complicated and unpredictable due to staffing needs and the cost of raw materials, have so far been minimized by high demand for the products they create.

Yet inflation continues to outpace rising wages, and this could have negative consequences for workers, and the economy as a whole, economists say.

Companies forced to pass on the costs to consumers

Tim Steele, founder and CEO of Microspec Corporation, who runs the business with his wife Elizabeth, said the company is having its best year ever despite inflation, supply chain backups, and labor market woes.

But the rising cost of raw materials and the need to raise wages to remain competitive means his company’s prices are going up as well.

“I hate to do it, but I’ve been raising prices as much as 20%,” Steele said, explaining that the raw materials used in the medical tubing his company produces, are made at plants near Houston, Texas, which have slowed production because of a deep freeze two winters ago. “The manufacturing plants that take the raw materials used to make polyurethane shut down and they haven’t recovered. That has made polyurethane in very short supply for the entire medical device industry.”

And this is a really big problem, Steele said.

“We’re getting about 90% of the polyurethane we need to keep customers happy,” he said. “We’re being hurt by that, but in addition the price of polyurethane is going out of sight. In just this year alone we’ve had three price increases from the biggest vendor. Prices have gone up 24% in 2022.”

Once a raw material is secured, Steele said vendors can’t be changed without going through the Food and Drug Administration for approval.

“Some companies are out more than a year and it’s going to go right down the supply chain. So when you go to the hospital and need a picc catheter that’s going to cost a little bit more.”

Despite cost increases and hiring challenges, Microspec is expanding

Despite these cost increases, Microspec, which employs 100 people, is currently adding manufacturing space to its second floor and looking to fill 10 entry level manufacturing positions.

“Employees have been difficult to come by,” Steele said, adding that Microspec raised entry level starting wages by over 18% at the beginning of the year, now offering close to $20 per hour for starting positions. “Manufacturing positions are what we’re having a difficult time hiring for.”

Microspec, along with Teleflex and Millipore Sigma in Jaffrey, are a few of the leading suppliers of various medical components used in elective surgeries. The company sells its products to some of the biggest medical device companies in the world including Johnson & Johnson, Medtronics and Stryker, as well as Teleflex.

Steele recently purchased 113 acres off Route 202 just north of Microspec’s current facility in Peterborough where he hopes to build a second facility as well as workforce housing.

“This is a major undertaking, and we’re looking to get some money out of the state,” said Steele, referring to $100 million dollars that Gov. Sununu has earmarked for workforce housing. “That could be a game-changer and will certainly have an impact on the Peterborough area. We’ve already purchased the land and now we just have to make it happen.”

Microspec produces about 200,000 picc catheters and other types of catheters related to vascular procedures each year which amounts to millions of feet. Steele said that when elective surgeries stopped at the beginning of the pandemic production fell off by close to 40%.

“Much of what Microspec makes is used in elective surgery procedures and we were hurt in a big way by the pandemic in 2020,” he said. “Our production fell off by about 40% but our R and D business boomed and did quite well. That was a flat year but we stayed even. While our profit margin fell, no one was laid off and I think we’re a better company because of that.”

Rate of inflation outpaces rate of wage inflation

University of New Hampshire Professor of Macro Economics Michael Goldberg said the big issue macro economists are looking at regarding inflation is wages.

“Wages are going up, but not at the rate that inflation is going up,” said Goldberg. “As long as wages don’t rise as fast as prices, then even if companies’ margins are not suffering, their workers are still feeling it. Macro economists are really worried about this.”

One of the questions that remains unanswered, Goldberg said, is to what extent higher inflation rates are transitory. If inflation is largely the result of supply chain problems stemming from natural disasters, pandemics, the Ukraine war, OPEC, or other things “that policy doesn’t really influence” this could mean it’s not systemic to the economy.

“If it’s not necessarily systemic to our economy, as a consequence, inflation will come down and we can have what some people are calling a soft landing,” he said. “The Fed believes in that story and maybe they’re right. That’s one view of the future.”

But Goldberg conceded that there’s no consensus amongst economists on when inflation will drop.

“For decades there was a consensus that the conceptual frameworks they used to try to predict the future and get ahead of information worked, and then those conceptual frameworks essentially stopped working – or providing good answers – about four years ago,” he said, adding that today getting ahead of inflation has become less proactive and more reactive. “So what [the Federal Reserve Chairman] decided to do was to be reactive. The interesting thing is that nobody knows the truth about the present or even the past.”

Goldberg explained that the conceptual frameworks used today to project inflation rely on various sources of data but that there are a range of views.

“And its important to look at all of these views. We can look at the data and get a sense for what’s going on, but there’s going to be a range of views and it’s actually really important to consider a wide range of them,” he said. “There are people who think that we saw the bottom in the market and we’re on our way back up. And then there are other people who say no, ‘the bottom has a long way to go down.’ ”

One of Goldberg’s, and other economists’ biggest fears is another 1980s wage spiral which results from rising wages, which in turn creates higher demand and rising costs.

“If elevated inflation stays at say 6% for another year or two people are going to say, ‘you need to keep me level here,” he said. “But then firms will have to pay higher wages and pass those costs along, or at least try. And that leads to a vicious cycle which is what happened in the ’80s. This is why the Fed is raising rates.”

One of the most sensitive sectors due to rising interest rates is the housing market. The 30-year mortgage has almost doubled what it was in recent years, and on top of a shortage, people can’t afford it, Goldberg said.

“If inflation expectations are well-anchored then wages don’t have to rise as much, and if wages don’t have to rise as much companies don’t have to increase prices as much because for a lot of companies the biggest cost is wages,” he said. “The last time that we had double-digit inflation there was such a wage-price spiral that got embedded into the economy and then the only way to get rid of that is if the Fed jack’s up interest rates.”

NH Ball Bearings

Ninety-five percent of the aircraft flying today contain bearings produced by New Hampshire Ball Bearings, Inc., headquartered in Peterborough. The company manufactures ball bearings and bearing assemblies for aerospace, defense, medical, dental, and high technology markets.

Founded in 1946, the $1.3 billion dollar company employs 3,000 people, nearly 20% of which are graduates of the University of New Hampshire. The company’s Peterborough facility employs 440 people.

NHBB Director of Procurement Mark Compos said the effects of inflation have been reduced because of the company’s relationship with its parent company MinebeaMitsumi, a Japanese company that produces products used in a broad range of high demand industries.

Compos said the company is currently hiring for entry level positions.

“We have seen inflation in some key materials, services, and in transportation costs [and] we watch energy markets carefully as well,” said Compos. “We are very fortunate to be able to leverage the buying power of our parent company, MinebeaMitsumi, and partner with our suppliers and customers to secure materials and services at reasonable costs.”

Most of NHBB’s materials are domestically sourced, Compos said, adding that supply-chain issues are something the company remains focused on in order to “align production efforts with those of our suppliers and customers.”

And despite disrupted supply chains and inflation, demand at NHBB is high, according to Compos.

“What we make goes into aerospace – commercial airplanes, military jets, helicopters and engines for those aircraft. We also manufacture bearings for defense applications,” he said. “While COVID-19 had brought demand down for a while, people have started flying again, and the market has now rebounded. Demand for our products is, again, high.”

For Steele, if a recession comes he said his costs could come down and he hopes they do. One thing about the medical market, he explained, is that bad economies or recessions typically don’t affect his business.

“We’re more or less insulated from that,” he Steele. “People keep getting sick and that’s unfortunate but that’s a fact of life. Even during bad times we’ve always done well.”

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