Molders Economic Index:Katrina and the Fed: The economy moves forwardMolders Economic Index:Katrina and the Fed: The economy moves forward
November 1, 2005
Two key developments show just how rapidly the U.S. economy—which includes a reinvigorated manufacturing sector—has shrugged off the impact of hurricane Katrina and the far less damaging storm, Rita.Citing fear of inflation and the underlying strength of the U.S. economy, the U.S. Federal Reserve (aka the Fed) raised interest rates and strongly indicated that it would keep on raising them indefinitely.
After this move by the Fed, the Institute for Supply Management (ISM) in Tempe, AZ reported that manufacturing grew sharply in September. However, the normally buoyant service sector suffered in September, showing a significant decline, according to ISM. We believe that to be a short-term result of Katrina and to be only temporary.
ISM’s production index advanced to 59.4 from 53.6 in September for the industrial sector’s 28th consecutive month of growth. It was the highest reading since the gauge hit 59.6 in August 2004.
So where do molders stand now facing winter, higher resin prices, and other perceived obstacles to growth?
We continue to project solid growth for injection molding, at least through June 2006 and possibly beyond. The rate of growth will vary, with some sectors sliding. The most fragile molding sector is automotive, while housing-related molding activity continues to roar ahead, with the massive rebuilding required after Katrina to help.
The Crisis in Automotive
For molders serving the traditional powerhouses Ford, GM, and Chrysler, the outlook is very grim. Delphi, the world’s largest automotive parts supplier, now is in Chapter 11. Others, such as Visteon, are struggling. Parts suppliers, including Collins & Aikman and Tower Automotive, have filed for bankruptcy protection already.
Ford, eager to cut costs, announced plans to reduce the number of primary parts suppliers by half to about 100 firms. How small is that number? In 1980 Ford worked directly with almost 3000 parts suppliers.
Ford—and this also applies to GM and Chrysler—wants to deal with large companies only, which of course can hire other firms to supply components. But the key here is cost cutting: A handful of large suppliers are much more easily pressured to cut prices.Detroit’s carmakers had a good summer—at least on the surface. They managed to clear much of their inventory at ultralow prices, but now the hangover is setting in. GM’s sales in September dropped 24%. Only the foreign companies assembling cars and light trucks in North America are doing well.
Overall we will see sales rates of less than 16 million units for the next few months, resulting in further cuts for parts suppliers in Detroit.
Imports of large injection molding machines (more than 1500 tons clamping force) are at very high levels this year; most of these units are going to automotive molders working with companies such as Honda, Toyota, Nissan, and BMW. Very few of these machines will go to the suppliers for Ford, GM, or Chrysler.
Katrina, Oil and Gas Prices
In many ways Katrina will boost output for molders. The estimated $300 billion to be spent on reconstruction in the hurricane-ravaged areas will translate quickly into larger orders for all chief molding sectors.
We anticipate that durable goods orders for October, November, and December will show a sharp rise for housing products, furniture, electrical items, electronics, and medical products. Foreign car and truck makers will also benefit from the anticipated higher demand for vehicles as those lost in the storm are replaced.
Housing, already enjoying booming growth for several years, will continue to rise. This will sustain large sectors of manufacturing for at least the next year. But regional differences do matter. The South and Southeast will show the sharpest growth, while the Northeast and mid-Atlantic states will have moderate housing growth.
In a way this hurricane will be a major benefit to the domestic molding market, with molders from all over North America in line to benefit.
The speed of the reconstruction effort will also reduce some consumer price sensitivity. This is critical for molders who are hit with sharp price increases for resin and additives.
Molders may not make more money, but at least they will have an easier time passing on price increases to consumers. The one exception is parts buyers for Ford, GM, and Chrysler, who continue to insist on lower prices.
Manufacturers and molders will struggle with the impact of very high—and projected to stay high—prices for natural gas, one of the primary feedstocks for resin. But molding plants will also face substantially higher energy costs; just to run a molding plant will cost more than ever. Selling product is also a higher-cost item. Airline travel is more costly now and molders of all sizes depend on salespeople out on the road.
With a widely anticipated cold winter, we will not see any moderation in energy prices for many months.
The Fed does see inflationary pressures here and will further tighten money supply. Yet we do not anticipate that the ability of molders to invest in new labor-saving capital equipment will be impacted much, if at all. Recent import data on molding machines show that U.S. manufacturers continue to invest in all types of injection machines.
The Trade Picture
China remains a major issue. The “readjustment†of China’s currency was a sham. In reality the Chinese government allowed the yuan to float just .3% against the dollar.
In other words, China has retained its ability to sell at ultralow prices. The political damage to the Bush Administration, thanks to an inadequate hurricane response and setbacks in Iraq, makes it unlikely that either the president or Congress will make any effort to worry about trade issues with China.
So, low-priced imports will continue to trouble molders and we do not anticipate any tangible change in this competition for now.
In this exclusive monthly index, IMM provides an outlook on specific markets and the industry in general. MEI is a record of production statistics that is indexed to the base period of July 1994 as 100. It also gives year-end projections. In January 2001, we began tracking, for comparison, the Federal Reserve Industrial Production Index. Historical data is provided for both indexes, as well as for key markets. 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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