Sponsored By

July 1, 2004

5 Min Read
Molders Economic Index: Strong manufacturing growth good for molders

The recovery in manufacturing and injection molding appears to be substantially stronger than most thought just four weeks ago.

A flood of new data shows just how widespread and solid molding output growth is, and with new orders coming in at a steady rate, significant new capital spending and plant expansions are likely later this year.

The worrisome issues? Oil and energy prices are cutting into many molders’ profitability; import pressures remain a big problem, particularly for molders of commodity, lower-end molded parts; and few molders have any real pricing power, unable to pass along cost increases to boost margins.

In the long-term, an increase in interest rates is likely to increase costs for capital spending.

Manufacturing Resurgent

All of U.S. manufacturing completed a full year of expansion this past May and pushed factory employment to its highest level in 31 years.

The Institute for Supply Management (ISM) reported that its index of factory activity rose to 62.8 in May, up from 62.4 in April. The yearlong stretch of strong growth helped push the ISM’s employment index to 61.9 in May—the highest since April 1973—from 57.8 the prior month.

Key for molders in the Nafta territory is that exports of manufactured goods are showing the first real increase in years.

Temporary Dip: Orders

The very cyclical factory orders index posted the biggest decline in a year this April as demand for a wide array of goods fell.

Factory orders fell 1.7% in April after a 5% gain a month earlier, the Commerce Dept. said. It was the biggest monthly decline since April 2003. The decrease in orders reflected a large drop of 3.2% for durable goods, the biggest drop since September 2002. Overall, other orders for nondurable items were unchanged in April.

Anecdotal reports as well as the ISM order index for May show that the orders came back strongly in May and continued to expand in June.

Housing Remains Hot

It is bound to continue for at least 12 months and probably beyond: a boom in housing that results in sharp increases in orders for many types of molded products.

Construction spending jumped in April to a third consecutive record high as slowly rising mortgage interest rates spurred a rush to build, a government report showed.

In April construction spending rose 1.3% to a seasonally adjusted annual rate of $970.39 billion, up from a revised $957.63 billion pace in March, the Commerce Dept. said. Some say now that this should lead to upward revisions in the pace of Q1 economic growth, which the Commerce Dept. estimated at 4.4%. The department’s final GDP estimate was due on June 25.

Note that public construction climbed 1.7% to $230.47 billion, also a new high, from $226.58 billion, while private nonresidential construction rose for the third straight month to $219.19 billion, the highest level since March 2003. All of this is a sign of growing business investment as the economy strengthens.

Such large-scale construction projects spell good news for molders: strong demand for large volumes of identical molded parts to furnish such buildings—everything from plumbing fixtures to lighting products.

Meanwhile, sales of previously owned homes rose more than expected in April, increasing 2.5% as home buyers jumped to act before interest rates rose further, a trade association report showed.

Resales of homes climbed to a seasonally adjusted annual rate of 6.64 million units in April from 6.48 million in March, the National Assn. of Realtors said. This should produce solid order increases for products such as appliances, air conditioners, furniture, light and plumbing fixtures, and (increasingly so) sophisticated home electronics—everything from alarm systems to power management units.

Reflecting anticipated Fed action, interest rates for 30-year fixed-rate mortgages rose for nine consecutive weeks by early June. However, even a jump in this rate is widely believed to not slow housing as consumer income is growing sharply also.

Automotive Strong

Positive car and truck sales data are one set of good news in the market so critical to U.S. molders. A second set of data is anticipated for July, when import and export data on automotive parts will show a sharp decline of car part imports. The weak dollar is having a significant impact on such imports (excluding Nafta partners Mexico and Canada), while exports—even to China—of automotive components from the U.S. are surging.

Overall, May car sales were up 6% and truck sales jumped 8%. Asian firms benefited the most—with overall sales up 14%, while the traditional three Detroit firms saw sales jump 5%.

Asian firms are far less of a threat now than ever before. Much of the assembly has been shifted into the North American territory and Nafta-based suppliers are flourishing.

Overall, the first five months of 2004 saw car and truck sales rise a cumulative 7%.

Some Bold Predictions

The way we now read the economic tea leaves, North America’s molders are in for sustained growth at rates of at least 3.1% for the next 12 months. The only real risk we see is a major terror attack that could reverse current growth patterns.

We base these predictions on the following factors:

  • Oil and gas prices will show sincere moderation starting this September.

  • Buyers of injection molded products will accept some price increases as they fill inventories prior to Christmas. This will boost the still weak margins of molders.

  • Imports will show restrained growth (except for commodity items), bringing much-needed relief to many molding shops across North America.

  • Real wage increases along with a continued housing boom will continue to advance demand for molded products—primarily sophisticated subassemblies. (Keep in mind that consumer spending accounts for two-thirds of the U.S. economy.)

  • China’s currency may gain somewhat in value—courtesy of election politics—and thus help with a wave of imports.

MEI is a record of production statistics that is indexed to the base period of July 1994 as 100. Agostino von Hassell of The Repton Group, New York, NY, prepares this index. Contact him at [email protected].

Sign up for the PlasticsToday NewsFeed newsletter.

You May Also Like