Molders Economic Index: A bump in the road—or a more serious trend?

Manufacturing could and should do better. We anticipate weakness in key injection molding markets for much of this spring. The molding sectors most fragile right now are automotive, some housing, and a wide range of consumer goods.

The troubling signs are pricing pressure and the growing impact of high oil and higher natural gas prices, which will reduce consumer spending. Higher interest rates combined with intense pressure from imports make life substantially harder for injection molders. Capital investment, for instance, may slow and that is the main route toward regaining measurable competitiveness with aggressive importers.

The Institute for Supply Management (ISM; Tempe, AZ) reported in early January that the manufacturing sector grew in December for the 31st consecutive month, while the overall economy grew for the 50th consecutive month.

The ISM production index stood at 54.2, down sharply from the reading of 58.1 in November 2005. New orders and inventories also declined but remain in the growth area (all readings above 50 indicate growth). Somewhat troubling was a measurement that shows that customers’ inventories increased, which could depress future orders.

Global growth

North America’s molders can expect some import pressure relief as global economic growth increases and as more products are consumed in rapidly expanding economies such as India and China.

December 2005 data show that global manufacturing continued to improve. The Global Manufacturing PMI—-a composite index produced by JPMorgan and NTC Economics in association with ISM and IFPSM (International Federation of Purchasing & Supply Management)—-posted 54.0. However, the PMI has fallen for the past two months, suggesting that the current uptick in global manufacturing growth is losing momentum. The data also show that after many months of slow expansion, the euro zone reached a 17-month high in production growth.

Somewhat less positive are data for new global orders. The Global Manufacturing New Orders Index eased further from September’s recent high of 57.4 to its lowest level in four months.

U.S. orders (Web-exclusive segment)

Passenger jets are, unfortunately, not a major outlet for molders. Yet new orders at U.S. factories rose 2.5% in November as strong demand for civilian aircraft offset weakness in cars and machinery, the Commerce Dept. reports.

Much of November's strength in factory orders came from civilian aircraft. New orders for transportation equipment rose 15.8% as nondefense aircraft and parts orders surged 134.3%. At the same time, defense aircraft and parts orders slid 42.9% and car and parts orders dropped 7.8%. It was the weakest reading for auto orders since December 2002, when orders tumbled 11.4%. With transportation orders stripped out, factory orders were flat in November.

Most worrisome for the future competitive stance of U.S. manufacturing is that capital goods spending slipped 2.1% in November. While trade data for injection molding machines are not available for that month yet, anecdotal reports show that many molders have cut the rate of investment in new machines.

Orders for durable goods rose 4.4% in November, reports the Commerce Dept.

Electronics

Injection molding of electronics components in North America continues to grow, although not at the high rates seen in the 1995-1998 period when annualized growth exceeded 13%.

We anticipate orders for North American molded components for electronics to decline and settle at an annualized rate of about 6%, faster than most other injection molding sectors. That’s the bad news. The good news is that most of these orders are high-value-added with solid profit margins; end users of such parts—such as computer makers—rely on U.S. molders more and more for short runs of complex parts. The high-volume business is increasingly shifting to China now and soon India will be a major factor here.

In 2004, China surpassed the U.S. as the world’s top exporter of laptop computers, mobile phones, and other information and communications technology devices, the Organisation for Economic Co-operation & Development (OECD) reported. China exported $180 billion worth of so-called ICT goods in 2004, compared with U.S. exports of $149 billion, according to the OECD, a free-market agency funded by 30 countries.

Shift to foreign carmakers

In hindsight, 2005 will be seen as the year the old-fashioned automotive parts molding—high-volume production for companies such as GM, Chrysler, and Ford—came to an end, replaced by increasingly dominant smaller molders. These shops are profitable and supply parts to the rapidly expanding Japanese, Korean, and German carmakers in the United States. They are typically located close to the assembly plants and rely heavily on automation.

December 2005 truck and car sales data continued the rough trend for Detroit: Sales for GM and Ford tumbled 10.2% and 8.7% respectively while Chrysler recorded a 2% drop. For the year, GM was down 4%, Ford down 4.4%, and Chrysler up 5%. In sharp contrast, Toyota saw sales jump 8.2% in December. Asian carmakers had a 36.5% share of the U.S. market through November of last year, a 1.9 percentage point increase compared with the same period a year ago. U.S. automakers, on the other hand, lost 1.7 points of market share.

Projections for 2006 are grim: The Big Three are unlikely to see any substantial sales increases and have to struggle with major ailing parts makers such as Visteon and Delphi. Asian and German carmakers are likely to further boost output in 2006 and add to their market share. Overall, 17.9 million cars and light trucks are likely to be sold in 2006.

Agostino von Hassell ([email protected]) of the Repton Group (New York, NY) prepares this index.