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July 25, 2002

6 Min Read
Molders Economic Index: Is the recovery fragile, or does it have legs?

IMM MEI and Federal Reserve Industrial Production Index
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We strongly believe that the recovery in the injection molding manufacturing economy will continue. We anticipate solid growth for all this year and at the very least 3.6 percent in years to come.

At such a rate of expansion, overall output of molded products in the U.S. will virtually double in 20 years. When the boom molding economies of Mexico and Canada are included, growth will double the output of molded products in the NAFTA territory in as little as 14 years (below).

Projection Growth of Molding Market
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What can derail the current economic recovery? We have a few storm clouds on the horizon. The possibility of major terror attacks looms large. Consumer spending may take a major hit from the depressed state of the stock market. And Argentina's meltdown is seemingly spreading to Brazil.

Still, according to a late June poll of 55 economists conducted by the Wall Street Journal, the U.S. gross domestic product (GDP) is expected to grow 3.5 percent for the second half of 2002 and 3.6 percent for the first half of 2003.

The Decline of the Dollar
U.S. molders can rejoice. The value of the U.S. dollar slid sharply in past weeks and is trending lower. For instance, in May 2002, it took 1.09 euros to buy $1. By early July the two currencies had reached virtual parity. The same is the case with the Yen, which has strengthened considerably in past weeks, partially a reflection of a manufacturing recovery in Japan.

The effect of the lower dollar will not be immediate. But with the current values likely to persist, molders will see over the next six months higher prices for imported machinery, molds, and materials. And competing molded products from Asia and Europe will also rise, on average, 10 percent in price. At the same time export opportunities for U.S. molders have been boosted: They can, without financial loss, lower prices abroad by as much as 10 percent.

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There are some negative effects for molders with operations in Europe: Profits from there will have a reduced impact on their overall corporate bottom lines.

The lower dollar value started to show an initial, albeit minor, impact in May. U.S. import prices were flat in May as falling car and capital goods costs offset price rises for petroleum and industrial supplies. The Labor Dept. said U.S. import prices were unchanged, well below Wall Street expectations for a .4 percent increase, and following a 1.6 percent rise in April.

In months to come we will see an increase in import prices, most economists predict with great confidence. Already in May prices for imports of industrial supplies and materials rose .4 percent, following a 6.2 percent rise in April. Export prices for the month also fell, posting a drop of .1 percent, pulled down by the cost of some agricultural products and capital goods.

Historical Data for Key Markets
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Growth in Manufacturing
Manufacturing activity grew for a fifth straight month in June and at a faster pace than the previous month. The Tempe, AZ-based Institute for Supply Management (ISM) said its index of business activity rose to 56.2 in June from 55.7 in May. Analysts had been expecting a reading of 55.5.

Also in late June, Commerce reported that durable goods orders—items expected to last at least three years—rose .6 percent in May, compared to a .4 percent increase the previous month. However, at the same time the Commerce Dept. said construction spending fell by .7 percent in May to the lowest level in five months, due in part to a drop in office and other commercial construction. Many analysts had forecast a .3 percent increase.

The ISM report aligns closely with reports from injection molders who tell us of solid increases in orders and shipments and a solid outlook for later this year. Still, many molders and other manufacturers are not yet convinced this recovery is a strong one. As a result, few have made big commitments, including investments in new plants and equipment-a key ingredient for a sustained rebound.

Overall industrial production rose .2 percent in May, according to the last report from the Federal Reserve. Categories reporting higher production levels included home electronics, computers and office equipment, appliances, furniture, and carpeting. But production of automobiles and parts and communications equipment declined. In April, industrial output went up by .3 percent, according to revised figures. That was a slightly smaller gain than the .4 percent increase previously estimated by the Fed.

Inventories are down again. In April, inventories dropped for the 15th straight month, Commerce reported. As the economy moves into the prime selling season—back-to-school sales as well as the lengthy holiday season—retailers will be forced to boost inventories and create a mini boom for molders.

The biggest change molders report is that orders neatly spread out over many months appear to be a thing of the past. Most buyers of molded products who used to sign long-term delivery contracts have shifted to just-in-time ordering, creating sudden flurries of last-minute orders. This adds to the level of uncertainty among molders: They do not know how much more they will sell and thus are reluctant to boost production capacity through the purchase of new machines.

Europe and Japan
Both Europe and Japan show signs of growth. For instance, in June the Japanese government reported the sixth increase in industrial production. And overall industrial output has shown measurable signs of growth all over the Euro territory.

The European Central Bank, however, is somewhat worried that the boost in the value of the euro could create inflationary pressures. Yet at the same time the standby tool—higher interest rates—seems to be an unpalatable choice because it could slow the emerging economic growth patterns.

Housing Boom
Although construction spending slowed somewhat in May and June, housing starts surged an unexpectedly large 11.6 percent in May, the biggest percentage rise in almost seven years and a reversal of two straight months of falls, the Commerce Dept. reported.

In May starts on new homes jumped to a seasonally adjusted 1.733 million annual rate. Single-family starts—the largest category of activity—jumped 9.6 percent, an increase not matched since July 1995, Commerce said. For molders in markets such as appliances, furniture, building parts, electrical components, and small appliances, housing starts typically translate to orders some six months later.

The housing market appears to continue its boom and this will, many molders say, help sustain a recovery.

Computers Show Growth
Finally, real signs of growth in the PC market mean good news for office and home electronics such as notebooks, printers, scanners, and copiers.

Global PC shipments likely topped the 1 billion mark in April, 25 years after the start of shipments in 1977, IT market research firm Gartner Japan Ltd. said in early July. It took more than 20 years for the total number of shipments to reach 500 million units, which came in the first half of 1998. This means that since 1998 more than 500 million PCs were shipped. The overall outlook: total shipments will top 2 billion by 2008 or earlier.

Yet, despite U.S. growth in PC and related shipments of more than 14 percent for the first six months of 2002, parts are increasingly coming from Asia, Mexico, and Latin America.

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

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