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Molders Economic Index: Hurricane Katrina: Will opportunity arise from this disaster?

October 1, 2005

5 Min Read
Molders Economic Index: Hurricane Katrina: Will opportunity arise from this disaster?

The immediate economic effects of Hurricane Katrina, which devastated three southern U.S. states in late August, were felt within days: sharply higher oil and gas prices, higher unemployment, and a severe negative impact on consumer confidence.

Even before the hurricane hit, some aspects of the economy had shown troubling signs. Molders across North America must now face up to reduced growth expectations for Q4 2005 and into 2006.Note that we are not projecting any recession, but rather we anticipate that key pillars of the injection molding market—housing, electrical, electronics, and automotive—will have reduced growth rates on a short-term basis, as reflected in this month’s index.

Yet as molders start planning capital investment for 2006 and assess profitability prospects, contingency plans are important. Additional shocks such as this hurricane could easily derail current growth patterns.

Overall we believe that the U.S. economy will bounce back from this shock. Molders may actually benefit; we are optimistic for the longer term.

The economic data for August and early September have become somewhat meaningless. It will take September and beyond for the manufacturing economy to sort out the long-term impact of the hurricane. Even grim September manufacturing data will have little meaning. Anticipate sharp improvements in October.

Positives and Negatives

  • The sharp rise in gasoline prices appears to be temporary. By Oct. 1, we will have settled back down to a more comfortable—albeit still high—average of $2.50/gal. Still, the cost of travel and shipping goods and the negative impact on consumer spending cannot be underestimated.

  • The unemployment shock—with more than 650,000 people in Louisiana, Alabama, and Mississippi out of work for possibly months—will hurt domestic and import orders for molded products.

  • Disruptions in port operations in New Orleans, LA; Mobile, AL; and other key southern ports will hurt the smooth import of critical raw materials as well as the export of finished goods. The plethora of Southern automotive assembly plants and burgeoning electronics industries that have brought manufacturing (and molding) jobs to the deep South and Texas are mostly damaged. But again, this is temporary.

  • The housing market will, in a perverse twist, continue its boom. Additional interest rate hikes from the Federal Reserve—reacting to oil price hikes and reduced consumer spending—may be delayed. The boom resulting from massive reconstruction in the South will be a major benefit to molders serving all housing-related markets.

  • September industrial production data look grim, but that is misleading. We anticipate the economy to snap back in October, barring a major terrorist event or other natural disasters.

Strong August

While some data for August give reason to worry, in general we still have a healthy manufacturing economy.

Economic activity in the manufacturing sector grew in August for the 27th consecutive month, while the overall economy grew for the 46th consecutive month, according to the latest report from the Institute for Supply Management (ISM; Tempe, AZ).

Norbert J. Ore, chair of the Manufacturing Business Survey Committee, says, “The manufacturing sector grew for the 27th consecutive month in August based on the ISM data. While not as strong as in July, the PMI still indicates significant economic growth in both manufacturing and the overall economy. Both new orders and production continue at relatively strong levels. This month’s comments from supply managers indicate great concern over recent new highs in energy commodities. Many express concerns as to whether current business strength can be sustained if high energy prices persist.”

The big fly in the ointment will be reflected in September data (and hit automotive molders hard): Detroit’s Big Three will now face a major dry spell while Asian and European assembly operations in the South will be forced to slow down due to problems in the supply chain.

As projected in our last report, the orgy of Detroit’s incentives has robbed GM, Ford, and Chrysler of many future sales. Sharp cutbacks in orders to automotive parts suppliers are now likely.August was stark in comparison to July’s booming sales data. Consumers bought nearly 1.5 million cars and trucks in August—a slowdown from the 1.8 million vehicles sold in July and 1.7 million sold in June, but about 3.8% more than last year. Truck sales slid 1%, while car sales gained 9.7% during the month.

However, GM saw sales decline sharply by 13.2%. Ford and Chrysler held their own with little change. Real sales gains came again from the Asian transplants, continuing the strong underlying trend of shifting assembly strength away from Detroit.

While Asian-transplant sales may continue strongly in September, production cuts for those firms are unavoidable as they struggle with supply chain disruptions. We project a reversal of this trend in October and November.

Preparing for 2006

In light of the disruptions caused by Katrina and other longer-term troubles—mostly higher gas prices—how should molders plan for 2006?

Overall, we anticipate growth to remain healthy and solid. This is across the board; some markets such as automotive, toys, and sporting goods may suffer as consumer spending declines. But a continued housing boom will sustain many molders from Canada to Mexico.

Capital spending growth has become almost a must for molders. Key are more advanced injection machines (mostly all-electric) and robotics for labor savings. Note that the Robotics Industry Assn. (Ann Arbor, MI) reported a 36% jump in robot shipments for the first six months of 2005 compared to 2004. The association estimates that more than 150,000 robots are at work in factories in the United States, placing the U.S. second only to Japan in terms of robot use.

Robots help molders. The Detroit News this past July reported how automotive moldmaker Midwest Mold Services Inc. of Roseville, MI managed to parlay a $1 million investment in robots into sharply higher sales—many related to repairing substandard, low-cost Chinese automotive molds.

Agostino von Hassell of The Repton Group, New York, NY, prepares this index. Contact him at [email protected] or visit www.thereptongroup.com.

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