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September 28, 1998

4 Min Read
All indicators seem to call for caution and prudence

Cool fall winds carry the message that our economy will again cool considerably in the fourth quarter. This, in turn, may project a weak start for 1999 and may even carry the risk of a brief recession some time over the next twelve months.

Many in injection molding may ask why this is. Inventories are low, demand for injection molded parts is growing, the effects of the lengthy GM strike have dissipated, and consumer spending remains high. This is all correct at this time. But looking ahead, it would be dangerous to overlook the many warning signs of what is to come.

For instance, there is growing economic uncertainty in Latin America. That market alone consumes more than 15 percent of U.S. exports. Those economies have started to contract Asia's malaise. Note the troubles in Venezuela, battered by dropping oil prices. Note the rapidly weakening markets of Argentina, Brazil, and Colombia.

In contrast, U.S. exports to Asia account for just 3.5 percent of all exports. And we all know--from Wall Street to Main Street--what impact that drop has had on earnings and manufacturing growth here at home. What will happen when a far larger market sours?

This fall, experts also note the first--still very minor--slowdown in consumer spending. Rapid consumer spending has fueled much of the growth in the past few years and has directly benefitted molders serving markets such as housing, housing components, electrical appliances, home computers, and the like. Cautioned by the bad news from Asia and the turmoil on Wall Street, early data suggest a cooling in this growth. Government data show personal consumption grew at a 5.8 percent annual rate in the second quarter, just below the 6.1 percent pace seen in the first three months of the year. The third quarter may show a rate of just 2.3 percent, caused in part by the GM strike. Keep in mind that in the first quarter of 1998 our economy grew at a blistering 5.4 percent annual rate. We believe, when the data are in, the third quarter will show less than 1.1 percent growth.

Indications of Weakness?

One sign of weakness is productivity. The productivity of U.S. workers posted its smallest gain in almost two years in the April-June quarter. Productivity rose a seasonally adjusted annual rate of 0.1 percent in the quarter, far below the first quarter's 3.5 percent increase. Total output in the non-farm business sector rose 1.6 percent, its smallest rise since a 0.5 percent gain in the same quarter of 1995, the Labor Department added.

Productivity, or output per worker hour, is a key gauge of the economy's health. Gains in productivity allow businesses to operate more efficiently, enabling them to boost workers' pay without raising their overall costs or hurting profits. U.S. productivity has been on an upward trend. In 1997, productivity grew by 1.4 percent, and it increased by an even stronger 2.4 percent in 1996.

A recently released index for August 1998 prepared by the National Association of Purchasing Management (NAPM) shows more signs of weakness. NAPM shows service industries have seen some sharp drops in growth. The NAPM manufacturing report showed factory activity contracted in August for the third straight month as export demand dropped.

Inventories

Many injection molders saw little actual growth in the summer months as OEMs such as medical parts makers, computer suppliers, and others rushed to reduce their inventories. This, in turn, depressed new orders to many injection molders.

While full inventory data for the third quarter are not yet available, initial data show U.S. wholesale inventories fell in July for the third time in four months, as the GM strike depleted stocks of cars and trucks. Inventories of computers also dropped sharply again as manufacturers continued to compete on price for the emerging, below-$1000 PC market.

Wholesale inventories fell 0.2 percent during July to $276,898 billion after falling a revised 0.1 percent in June, the Commerce Department reported. According to the Commerce Department, the inventory-to-sales ratio, which measures the time goods sit at wholesalers, fell to 1.29 months during July. That shows wholesalers are keeping their stocks in line with demand. This, in turn, means, with slowing consumer spending as well as lagging exports, few will want to build up inventories, further curtailing domestic orders.

Bright Spot: PCs

PC demand grows no matter what. Unit volume in the worldwide PC market in the third quarter is expected to grow year-on-year 11 percent, according to data released by International Data Corporation.

This analyst's firm now believes vendor shipments will grow 12.2 percent in the second half of 1998 with total year growth at 11 percent. Global volume increased 9.6 percent during the first half of the year.

U.S. growth in the third quarter is pegged at 14 percent, based on the continued strength of the low-cost PC market, healthy consumer demand, and a more vibrant portable computer segment.

IMM Projections

At this time, we are researching manufacturing activity in the injection molding industry to generate our forecasts for 1999 and beyond. As in the past, any reader input would be valuable. Please send any comments to [email protected].

The Molders Economic Index is prepared exclusively for IMM by Agostino von Hassell of The Repton Group, New York.

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