Molders Economic Index: Signs of manufacturing recovery spell growth (Web-exclusive: expanded content)Molders Economic Index: Signs of manufacturing recovery spell growth (Web-exclusive: expanded content)

Manufacturing is returning to growth. Although slight, at least it’s growth. We project that the injection molding market will grow on an output basis at the rate of 3.3% for the balance of 2003.

Some economists believe economic growth in the final six months of 2003 will range from 3.5% to just more than 4%. Others put it closer to 5%. In either scenario, this pace exceeds the 2.3% growth seen in the first half of 2003. We believe manufacturing growth will lag behind overall economic growth.

Key Economic News

Manufacturing output rose sharply in August for the second straight month. The Institute for Supply Management (ISM) reported that its manufacturing index rose to 54.7 for August from 51.8 in July. A reading above 50 indicates expansion, while one below 50 indicates that manufacturing activity is slowing. The index in August was at its highest level since a 55.2 reading in December 2002.

Norbert J. Ore, who oversees the index for the ISM, says, “Though two months of growth do not establish a trend, there is strength in the various segments of this report that we have not seen for some time.”

He notes that both new orders and production have had readings above 50 for four consecutive months, suggesting that “the continuation of a second-half recovery appears on track.”The foundations for growth are new orders. Orders for U.S. manufactured goods rose more than expected in July to the highest level in more than two years, helped by robust demand in a variety of sectors, the Commerce Dept. reported in late August.

Factory activity in the Mid-Atlantic region posted a stunning increase in August to a five-year high. The Federal Reserve Bank of Philadelphia says its index of factory business conditions jumped to 22.1 in August from 8.3 in July, far above economists’ forecasts of a rise to 9.9. The reading was the highest since June 1998, and it marked the third month of expansion, shown by a reading above zero.

Overall factory orders rose 1.6% in July to $329.4 billion, the highest level since May 2001.Orders for nondurable goods—items expected to last less than three years—rose 2.4%, while orders for expensive, long-lasting items like cars and refrigerators rose 1%.

Productivity, the amount an employee produces for each hour of work, soared at an annual rate of 6.8% in Q2 2003, even stronger than the government’s first estimate of a 5.7% growth rate. The revised reading marked the largest increase since Q1 2002.

Other Signs of Growth

Spending on construction ventures around the country increased in July to the highest level since the beginning of the year. The Commerce Dept. reports that the value of building projects under way reached a seasonally adjusted annual rate of $879.8 billion in July, representing a modest .2% increase from June’s level. This is the highest level since January, when such spending stood at $883.2 billion on an annualized basis.

Home construction jumped in July to the highest level in more than 17 years as the red-hot housing market showed no signs of slowing down, even as mortgage rates began to rise. The Commerce Dept. says housing construction totaled 1.87 million units at a seasonally adjusted annual rate last month, an increase of 1.5% over the June level of 1.85 million units.

The U.S. trade deficit narrowed sharply in June, as improving economic growth overseas propelled exports to their largest monthly increase in three years and imports were unchanged, the Commerce Dept. reports. The smaller-than-expected trade gap totaled $39.5 billion, down from a revised estimate of $41.5 billion in May.

U.S. exports of goods and services increased 2.4% to $84.6 billion in June, the largest month-to-month rise since June 2000. Exports were the highest since June 2001. Capital goods exports showed the biggest increase, led by civilian aircraft and computer accessories. Services exports also jumped, setting a record at $25.6 billion.

Imports from China hit their highest level in eight months at $12.1 billion. China accounts for about one quarter of the overall U.S. trade deficit and figures for the first six months of the year are on track to surpass last year’s record of $103 billion.

More Factories Closing

Here is just one of many examples of how the once-booming electronics sector is moving offshore, resulting in considerable reductions in opportunities for molders. Poway, CA-based Gateway Inc. says in September it plans to close a manufacturing complex in Hampton, VA and cut staffing at two South Dakota facilities.

Key Issues: Mexico and China

Injection molders in North America are increasingly understanding that the single largest threat to a substantial expansion of injection molding is China.

The figures are stark: Since 2001 some 500 of Mexico’s 3700 maquiladora plants have shut down, resulting in 220,000 jobs lost, according to the Mexican government. While the U.S. recession had something to do with it, the majority of the closed plants have reopened in China.

China’s exports to the U.S. grew some 20% in 2002. Mexico’s exports to the U.S. in the same time period were essentially flat. As a result, it is now generally anticipated that by the end of 2003 China will have replaced Mexico as the second-largest single exporter to the U.S. The largest exporter remains Canada, at least for now.

In 2002 China shipped almost $15 billion in sporting goods, toys, and bicycles to the U.S. and about $13.2 billion in computer accessories and peripherals.

Yet the issue now is this: Does China cheat? U.S. Secretary of the Treasury John W. Snow was in China in early September asking China’s government to consider letting the yuan float. Most economists believe that the yuan is undervalued by at least 40%. Others say it may be as much as 60%.

This currency manipulation by China is now drawing serious opposition with a major coalition of manufacturing groups contemplating trade action. Plastics groups have not yet joined in this effort. For more information go to the website of the Coalition for a Sound Dollar at www.sounddollar.org.

Agostino von Hassell ([email protected]) of The Repton Group, New York, NY, prepares this index. 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.

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