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April 1, 2002

6 Min Read
Molders Economic Index: Stronger signs that manufacturing is in recovery

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The manufacturing economies of the U.S., Canada, and Mexico are clearly on the path to recovery. A host of very positive economic reports over the past few weeks support this statement. Some already say that the recession may have been the "mildest in history" while others question if there even was a recession. Yet in manufacturing and injection molding, the recession was very real with the output of molded products contracting for at least a 12-month period.

How strong will the recovery be for molders? Opinions differ sharply, with most projecting relatively slow but solid growth in manufacturing output for the next 12 months. We project that the injection molding economy will grow a bit faster than the overall manufacturing market and may show a cumulative growth rate of 3.4 percent for the next 12 months.

We have adjusted the year-end growth targets upward in all end markets and may adjust them further as the economic news continues reporting signs of improvement for manufacturing.

Note that the economic news is far from perfect. New home sales plunged sharply in January and consumer confidence declined in February. Car and truck sales may run into some trouble in the coming months, and it remains to be seen just how strong electronics will be.

Considerable uncertainty is caused by foreign developments. The turmoil in Argentina threatens to expand to Brazil and may reduce lucrative exports for molders to that region. The effective deflation in Japan will allow Japanese molders to boost imports to the U.S. at record low prices, causing growing competition for primarily precision molded parts. And the strength of the economies in the European Union is uncertain at best: For now do not anticipate any growth in exports to Europe.

Injection molders are likely to benefit from solid increases in durable goods orders reported for January 2002. The Commerce Dept. reported that such orders jumped 2.6 percent in January, following a .9 percent rise in December.

An increase in durable goods orders typically takes three or four months to be reflected in orders to molding companies, which, in most cases, are suppliers of components only, rather than the makers of the final end product.

Beneficial to molders was solid strength in automotive, electronics, and industrial machinery. The latter suggests that American businesses have started to buy all types of manufacturing equipment.


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Durable goods orders may show continued strength: Inventories are very low across the board and retailers will need to stock up to support the traditionally strong spring and summer sales.

The Federal Reserve has frequently stated that growth in business investment is critical to recovery. Initial reports show that January 2002 injection machine sales finally showed some signs of strength, following 12 months of declines.

In February, manufacturing activity rose for the first time in 18 months while consumer spending and construction grew solidly. The Institute for Supply Management, formerly known as the National Assn. of Purchasing Management, reported that its index of business activity jumped to 54.7 in February from 49.9 in January, suggesting the battered manufacturing sector has pulled out of a long slump. An index above 50 signifies expansion, while a figure below 50 shows contraction.

Molders will benefit across the board from strong consumer spending, which accounts for two-thirds of all U.S. economic activity. Such spending rose .4 percent in January after being flat in December, the Commerce Dept. reported.

Total spending by consumers rose at a brisk 6 percent rate in the fourth quarter, the largest gain since the second quarter of 1998. The Commerce Dept. also reported that in January construction spending rose by 1.5 percent, the biggest such gain in one year.

Durable goods orders are up, as reported above. But there is important news for molders of packaging items—everything from caps and closures to food trays and similarly disposable items. For nondurable goods, such as food and clothes, consumers increased their spending by 1.2 percent in January, on top of a .8 percent rise in December.

Finally, the Commerce Dept. reported that the economy grew by a faster-than-expected 1.4 percent rate in the final three months of last year. In the third quarter of 2001, the economy contracted by 1.3 percent.


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STRONG HOUSING MARKET
Several major end markets for molded products will benefit throughout this year from a strong housing market. These markets are appliances, electrical products, furniture, and building components such as pipe fittings, window parts, and kitchen components. With relatively few imports in this market, U.S. molders will see most of the benefit, followed by Canada. Mexico, at this stage, is not yet a major supplier of molded parts for these markets.

Housing starts surged 6.3 percent in January, the fastest pace in two years. Builders began work on new homes at a seasonally adjusted annual rate of 1.678 million units in January, up from the 1.579 million rate in December, the Commerce Dept. reported. It takes about five to six months for injection molders to see a corresponding uptick in orders.

In contrast, sales of new homes plunged 14.8 percent in January, marking the biggest decline in eight years, the Commerce Dept. said. Just what this means is somewhat unclear. Initial data for February show a strong recovery in the sale of new homes, and the decline in January may have been only temporary.


INDUSTRIAL PRODUCTION
Some of the best clues to the strength in the manufacturing economy come from the detailed Federal Reserve data on industrial production.

Industrial production dipped in January by just .1 percent, the smallest decline in six months. The small decline followed a steeper .3 percent drop in December. It is reasonable to expect growth in industrial production for both February and March 2002, based on the sharp increase in durable goods orders as well as the increase in the index issued by the Institute for Supply Management.

As shown in the graph above, industrial production decreased in 14 of the past 15 months. More importantly—and this corresponds with our own data specific to the molding markets—the Federal Reserve saw production gains for furniture, industrial machinery, business equipment, computers, and semiconductors.


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AUTOMOTIVE: WEAK ONLY NOW?
U.S. sales of light trucks and cars dropped just 3.5 percent in February from a year earlier to 1.31 million units. This was a far better performance than anticipated, with most projections calling for a steep 10 percent decline.

Strong consumer spending boosted sales for carmakers such as General Motors Corp. (up .4 percent), Nissan Motor Co. (up 8.2 percent), and Toyota Motor Corp. (up 1.7 percent). Injection molders in Canada and Mexico are the primary beneficiaries of this rise.

However, both Ford Motor Co. and DaimlerChrysler AG saw sales decline by more than 10 percent in February.

The underlying strength of the automotive market is said to come from low-cost financing as well as strong consumer confidence.

What is the outlook for the rest of the year? Car and light truck sales are unlikely to beat the records set for 2001 but may still reach a very respectable 16.1 million units sold. This will sustain molders across the country. However, the continuing price wars may force U.S. car assembly plants to reach out to every lower-cost parts supplier, including those from China.

For a PDF version of the Performance of Injection Molding Markets table click here.

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

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