Molders Economic Index: Signs suggest manufacturing slump easing for molders

Layoffs, massive energy bills, blackouts in California, sliding orders, bankruptcies, and grim economic data: Is it truly this bad? 

Many molders have been battered by the deep slump in manufacturing of the past 10 months. With very few exceptions, almost every U.S. injection molding plant has been affected by the downturn. 

So why do we now say the slump is easing? We are going beyond that: We anticipate a solid recovery in injection molding output for the third quarter and even more so in the fourth quarter of this year with plenty of growth in 2002. 

The clues for this rather optimistic and startling forecast can be found in the volume of grim economic data released over the past few weeks. A detailed reading of this data coupled with anecdotal activity from molders shows intriguing signs of a pickup in growth. 

Why Bad News Matters 
So what's good about the bad news? Note that the rate of decline is slowing sharply. 

Our economy grew far more slowly in the first three months of this year than the government previously estimated, reflecting a steeper drop in business investment in computers and other equipment and weaker consumer spending. The Commerce Dept. reported that GDP grew at an annual rate of just 1.3 percent. We estimate that total output of injection molded parts in the first quarter dropped about 2 percent. 

The 1.3 percent first quarter growth rate was a slight improvement over the 1 percent showing in the fourth quarter of 2000. The second quarter of 2001, we project, will show growth in the .5 to .8 percent range and injection molding output in that period will come in about 1.7 percent below the first quarter. 

Equally bad is the report that durable goods orders plunged in April by 5 percent, following a 2.2 percent increase the month before. Orders for transportation products fell by 9.3 percent. Demand dropped sharply for computers and electronic products, including a steep 31.9 percent decrease in orders for semiconductors. Orders for industrial machinery dipped 2.8 percent. 

Note here that the output of U.S.-made injection molding machines in the first five months of 2001 was down about 45 percent based on some data. Imports of injection machines for the same time period were down about 7 percent. Thus, considering the respective market shares of imports vs. domestic, overall machines sales for the first five months are about 12 percent below the same period of 2000. But many injection molding machine makers see quoting activity up, and we anticipate a solid increase in orders and actual shipments later this year. 

For the first quarter of this year, Commerce reports, business investment in computers and other equipment decreased at an annual rate of 2.6 percent. In the fourth quarter, spending fell at a rate of 3.3 percent. 

Overall manufacturing activity declined for a 10th straight month in May, the National Assn. of Purchasing Management (NAPM) reported. 

NAPM stated that its purchasing index for May fell to 42.1 from 43.2 in April. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction. In injection molding this slowdown has been confirmed by reports of resin plants either shutting down or operating at reduced rates. 

Labor Dept. data show that employment in manufacturing companies producing primarily plastic parts has declined about 1.6 percent in the first five months of 2001 and that overtime spending in such firms is well below 2000 levels. Since July 2000, Labor reports, overall manufacturing has lost 675,000 workers. 

The Federal Reserve also reported that in April 2001 operating capacity at factories, mines, and utilities fell to 78.5 percent, the lowest level since April 1991, when the economy was emerging from its last recession. 

American workers' productivity, a key measure of rising living standards, fell at an annual rate of 1.2 percent in the first quarter, the biggest drop in eight years. Labor announced this in early June. The 1.2 percent decline was the largest since the first quarter of 1993, when productivity fell at a rate of 5 percent. 

Good News Also Matters 
Now for the signs pointing towards an imminent upturn. These are clues only, but we believe that the upturn in manufacturing will catch as many people by surprise as the sharp slowdown last year caught a good many molders by surprise. 

Consumer spending—which accounts for two-thirds of the economy—has held up and is growing again now. Key here is that consumer confidence rebounded in May with a higher-than-expected gain. 

Other good news: Injection molders and other manufacturers have worked down inventories, setting the stage for growth. Now inventories can be rebuilt for heavy sales in the last third of the year. The Commerce Dept. said business inventories fell by a bigger-than-expected .3 percent in March. The decline came even as sales slid by .3 percent. In February, inventories and sales both fell by .4 percent. 

Home construction unexpectedly rose in April, led by work on single-family houses, the Commerce Dept. reported. This is superb news for molders making appliance and furniture parts and components for electrical systems in houses. Molders will register the increase in demand in September. Housing starts are likely to remain strong due to the reduction in interest rates. 

New homes were started in April at an annual pace of 1.609 million units, up 1.5 percent from March's revised 1.586 million pace and the first increase since January. 

Also in April the Conference Board said its Index of Leading Economic Indicators rose .1 percent to 108.7 after slipping a revised .2 percent in March and .2 percent in February. 

Almost equally encouraging was a report that manufacturing in the mid-Atlantic region declined for the sixth straight month in May, but the rate of deterioration stabilized, according to the Federal Reserve Bank of Philadelphia. Its monthly index of business conditions in Delaware, eastern Pennsylvania, and southern New Jersey fell to -8.8 in May from -7.2 in April. 

On the surface the data are bad: New orders for big-ticket manufactured goods plunged in April as demand for aircraft, cars, computers, and a host of other goods slumped, the Commerce Dept. said. But if you look at the detailed data, sectors of key concern to molders showed only very modest declines—often less than 1 percent. Aircraft and defense goods are of little direct concern to molders while other markets—automotive and computers—matter far more. And in those sectors the rate of decline has slowed sharply, indicating that orders may actually start showing increases soon. 

Our informal survey of key injection molders confirms this. Molders in all market sectors except for toys and games have seen orders increase in May and anticipate further increases in June and July. 

Also indicative of growing strength in manufacturing are reports from a host of moldmakers: Orders have finally started to increase after a 10-month slump. And the demand for new molds is likely to accelerate. Note here that mold imports recorded the first solid gain in May, up 7.8 percent over the very strong May 2000. 

Our Forecast 
You will see in the table below projections for growth through the middle of 2002. These are optimistic. Some of our reasoning was explained above. And almost all sources contacted see order activity on an upswing. While the third quarter will still be slow, albeit with signs of expansion, the fourth quarter will show solid growth. 

There are some storm clouds in Detroit. Automotive molders, whose overall growth has been slow at best in the past six years, may see fewer new parts and new opportunities. In early June carmakers in Detroit said that in response to slowing sales and a weakening economy, they are cutting back on car and truck development programs to help reduce costs. 

All three major carmakers—General Motors Corp., Ford Motor Co., and DaimlerChrysler AG's Chrysler Group—have let it be known that they are either delaying or curtailing new model development. 

Just a few examples: GM's Buick Signia and Pontiac Banner, slated for release in 2004, have been delayed indefinitely. Two major automotive molders told us that they had been working on prototype parts for these cars and now have no clue when that business will materialize, if ever. Similarly at Ford, the company delayed the 2003 introduction of a new Ford Ranger pickup by at least three years. 

Even though sales of cars and light trucks have shown surprising strength in the face of a slow economy, U.S. carmakers—and thus U.S. molders—have seen little benefit from this. In May again, imports grabbed a growing share of the U.S. market. 

Overall sales declined a very minor 1.2 percent, resulting in an annual sales rate of 16.7 million. That is a very strong level. And even though GM saw sales increase .4 percent—the first substantive increase in a while—overall the market share of the Big Three dropped to 63 percent. In 2000 it was 65.6 percent. And for most of the 1990s, domestic suppliers controlled about 70 percent of the market. 

Global Cost Pressures 
The once-stellar growth rates in the electronics market have slowed sharply and will continue to slow even more this year. 

U.S. molders will have to compete with highly advanced technology and automation since import pressures of lower-cost goods are mounting. Note that average import prices of computer components and other electronics containing numerous injection molded parts declined 11 percent in the first quarter of 2001 compared to the same time period of 2000. 

The cost pressures are global. Note, for instance, that electronics giant Flextronics is now closing manufacturing plants in Singapore, and, citing lower labor costs, moving them to China and Malaysia. 

Taiwan, once home to a large concentration of injection molders cranking out parts for computers, notebooks, scanners, and modems, is also changing. Substantial manufacturing capacity, including molding plants, has been moved in the past five years from Taiwan to China. Today, 93 percent of all scanners in the world are made in Taiwan. But 80 percent of all parts are made in China. With monitors, where Taiwan supplies 54 percent of the global market, 45 percent of all parts are sourced from China. And sources at the Taiwan Institute for Information Industries say that this will accelerate. Taiwan will design parts and do all the preproduction, but the actual molding will be done in China. 

The Molders Economic Index is prepared exclusively for IMM by Agostino von Hassell of The Repton Group, New York, NY; [email protected].