Molders Economic Index: Manufacturing emerges from slowdown

Injection molders continue to see signs of improvement as new orders for injection molded parts start pouring in. As a result many molders anticipate a very strong second half of 1999 and solid growth well into the next year.

A vest-pocket survey of injection molders as well as analysis of manufacturing activity data shows that new orders have been particularly strong in several market segments.

Medical. Medical molders have seen increased orders for medical durables (i.e., components for medical machines and lab equipment) as well as disposables. U.S. Commerce Department data show that manufacturing in this segment may grow as much as 9 percent in all of 1999. And, welcome news for many, about half of the new orders are for export.

Consumer. The consumer spending boom is reflected in a strong increase in orders to molders of appliance parts, small consumer appliances, and electrical equipment used in new homes or for refurbishing. U.S. Commerce Department data suggest that some market segments, such as appliances, could see growth for the balance of 1999 at an annualized rate of 7.3 percent.

Electronics. Even though the import of injection molded parts and assemblies for electronics is at an all-time high, domestic molders can anticipate 11 percent or more growth this year, Commerce data and our surveys suggest. The U.S. electronics market is so strong that imports actually can't keep up with demand, and domestic supplies have to be used even though their costs maybe a bit higher, a source at one major PC maker said.

Signs of Growth
The most confidence-inspiring signs of growth are several months' worth of increases in durable goods orders. This, say injection molders, is reflected in their general activity level. More molders report having to use overtime and consider hiring again in order to meet demand. And some molders seem to have returned to aggressive spending on new capital equipment and facilities.

Overall orders to American factories for manufactured goods fell 1.2 percent in April, reflecting a big drop in demand for aircraft and other transportation products. The U.S. Commerce Department reported that the decrease in factory orders in April followed a 1.9 percent advance in March and was only the second decline in the past six months. But when you exclude the transportation sector, factory orders would have risen by .5 percent, posting the fifth increase in the past six months. A separate survey in early June by the National Assn. of Purchasing Managers also reported strength.

In other positive news reinforcing the continuation of a nine-year economic expansion, reports in late May and early June showed that the overall U.S. economy advanced at a slightly less brisk clip at the beginning of 1999 than previously thought.

Less growth is considered good news as it reduces the fear of sharp interest rate increases. The nation's gross domestic product grew at a revised 4.1 percent annual rate in the first quarter instead of the 4.5 percent previously reported. That was a slowdown from the final three months last year, when GDP shot ahead at a 6 percent annual rate. Another strong sign of solid growth is a pleasant increase in productivity, rising in the first quarter by 3.5 percent

Lower cost imports from Asia as well as Europe continue to damage the domestic business of some molders, particularly those in consumer products and toys. Commerce reported that consumer spending increased at a 6.8 percent annual rate in the first quarter-the strongest spending rise in 11 years, since a 7.2 percent jump in the first quarter of 1988. Consumer spending fuels two-thirds of economic activity.

Imports are growing at record rates for plastics parts such as toys, consumer durables such as vacuum cleaners or coffee makers, and injection molded parts and assemblies for computers and printers. But demand is growing so fast, say molders and sources in Commerce monitoring U.S. manufacturing, that there is plenty of growth left over for U.S. manufacturing plants.

Imports from Europe are competing effectively with high-value-added-molders operating in fields such as medical, optical products, or complex electronics parts. The sharp decline of the euro since January 1, 1999 has resulted in an almost automatic reduction in the cost of parts and goods imported from the European Union of 15 to 20 percent. One side effect is that orders for new injection molds from Europe have grown an estimated 22 percent. That's the word from moldmakers in Germany, Belgium, and Portugal. Data for the first three months of 1999 show injection machine imports at an all-time high.

IMM forecasts solid growth in injection molding for the balance of the year. But this may be limited to manufacturing alone, since some economic indicators suggest that the overall expansion of the economy, including the dominant service and information sectors, may slow the total rate of economic growth somewhat. The index of leading U.S. economic indicators posted its first monthly decline in almost a year in April, suggesting economic growth may cool later this year. The index fell .1 percent for the month; it was unchanged in March.

How Strong Is Housing?
Housing continues to fuel much of the growth in manufacturing. Many analysts had expected a fifth straight decline in home sales in April due to rising mortgage rates. But the Commerce department report showed strong sales in every region of the country except the West.

Other data may suggest a slowdown. However, we do believe this to be very temporary. Note that construction spending, which had been one of the driving forces in the economic expansion, fell by a sharp 2.4 percent in April, the biggest monthly decline in more than five years. This followed five straight monthly increases, including 1.3 percent in March and 2.1 percent in February.

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