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June 1, 2003

6 Min Read
Molders Economic Index: NPE: An economic watershed for molders?

As the plastics industry gathers in Chicago for NPE this month, a critical question for all is the future of the molding economy. Much hinges on how this evolves. Will there be a return to strong capital spending or will the loss of manufacturing jobs and future opportunities further depress an already slow market for injection machines?

NPE shows seem to come at critical times for the North American molder. The last NPE, in June 2000, heralded the start of a two-year manufacturing recession. In the three years since, the North American molding market has undergone dramatic changes on par with the rapid growth that marked much of the 1990s:

  •  Capital spending by molders has declined more than 25 percent from early 2000 levels. However, in just the past six months we have seen signs of improvement: Injection machine orders are up slightly and overall spending by parts makers of all types (including plastics) for capital goods has grown an encouraging 4.3 percent.

  •  Average capacity utilization has declined from 86 percent in February 2000 to about 75 percent in February 2003. Actual output growth of molded products—measured on a value-added basis—has grown just 2 percent in the same span. Average employment in all manufacturing industries in the U.S. has declined 18 percent in this period.

  •  The trade deficit with China has almost doubled in the last three years. The loss of molding jobs to China and Asia has accelerated and now is affecting the once-booming economy in northern Mexico.

    A New Situation
    The altered molding landscape comes with the certainty of more change. It is up to molders to analyze these changes and make the best of them. There are considerable opportunities for growth and improved profits. But it’s a new game; the old adage that higher production at fractionally lower costs will boost profits does not apply. Instead, molders in all markets need to adjust to markets that demand parts suppliers with a global or very broad regional presence.

    Take the relatively dull business of molding pipe fittings for plumbing. Molders here have done well here for more than 10 years as a seemingly unstoppable boom in housing created ever-growing demand for parts. But change is in the air.

    Construction is increasingly a business of large firms that build 4000 or 6000 units simultaneously. Large companies prefer to work with large suppliers. Says one major housing developer, “We would like to have maybe one or two suppliers for plumbing parts that can serve us across the U.S.” This is very similar to the demand of carmakers, which have dramatically shrunk their list of suppliers over the past decade.

    Regardless of the market, the push is for large, integrated molding enterprises. For molders who once provided parts for small, local markets, the choices are few: Merge or form alliances with other molders.

    We are also seeing more evidence that U.S. molders can be profitable by managing global parts manufacturing, with very little done in the U.S. While such molding firms with a global presence are the distinct minority now, by NPE 2006 this will have changed.

    Along these lines, two major Japanese injection machinery importers report that their sales to U.S. firms are substantially higher, yet actual shipments to the U.S. are down; molding firms in the U.S. signed purchase orders for injection machines destined for foreign locations.

    Short Term: More Uncertainty
    We had predicted that a quick war in Iraq would help return the North American manufacturing market to solid growth. We projected that the removal of the uncertainty over Iraq would stimulate markets and create a strong expansionary environment. We were wrong.

    The uncertainty over Iraq has been replaced in the short term by new and possibly even more worrisome uncertainties: SARS, trade issues, weak automotive markets, North Korea, and a generally lackluster U.S. economy.

    According to the World Trade Organization (WTO), world trade is set to stagnate this year under the impact of SARS, the war, and economic and political uncertainty. The WTO and others now say that global trade may expand just 1 to 1.5 percent in 2003. In December, the WTO had projected a 5 percent trade expansion for 2003.

    SARS is blamed for much of this. Early indications are that Asian regional trade is starting to show signs of decline. If this weakness accelerates, China may see its overall economy decline 1 or 2 percentage points in 2003. Other projections are grimmer: J.P. Morgan Chase says Q2 data in China may show a 2 percent contraction due to SARS. Growth should resume in the third quarter, provided the epidemic is brought under control.

    One effect of SARS appears to be reduced exports, and an increase in price on those exports that do arrive. Many say that the introduction of new products—critical to stimulate consumer spending—will also take a hit. The impact on the U.S. is likely a combination of fewer new products and somewhat higher prices for imports.

    Key Economic Developments
    Late April brought a flood of good and bad economic news. In summary, none of the reports indicates any rapid expansion of manufacturing:

  •  March durable goods orders jumped a strong 2 percent, according to the Commerce Dept., following a 1.5 percent drop in February. However, this increase was caused mainly by a surge in military equipment demand.

  •  Capital spending for all firms jumped 1.8 percent in March after dropping 5 percent in February.

  •  April manufacturing activity contracted again, according to the Institute for Supply Management, and Q1 productivity was down sharply. Overall U.S. GDP grew by an anemic 1.6 percent in Q1, says the Commerce Dept. This an improvement over the 1.4 percent increase in Q4 2002, but still far from levels needed for a recovery.

  •  Similarly, consumer spending, which accounts for two-thirds of the economy, increased a meager 1.4 percent in Q1, the weakest gain since Q2 2001. Spending decelerated from a 1.7 percent growth rate in Q4 2002.

  •  In March, industrial production fell .5 percent, the worst showing in three months, according to the Federal Reserve. Revised Fed data show that in February industrial output actually declined .1 percent—early data showed a .1 percent increase.

  •  Overall capacity utilization fell from 75.3 percent in February to 74.8 percent in March, the lowest figure since December 2001, the Fed reports.

  •  On a positive note, late April brought a welcome jump in consumer confidence—after four months of declines—and now all indications are for strong consumer spending.

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

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