Molders Economic Index: Tempering expectations: How much growth now?

Many molders complained to us that the recovery has not reached their order books. Others say that while there is growth, it is at rates well below the norm for most of the 1990s. Collectively, injection molders should temper expectations. Overall injection molding output growth will come in at about 3.5 percent for 2002, well below growth rates seen in the 1990s. Growth beyond this year is unlikely to be any higher.

The combined markets of Mexico, U.S., and Canada will see growth rates of about 4 percent in 2002 and just a bit above that rate in 2003. The latest crop of economic data is confusing at best. The economy grew at a stunning 5.8 percent annual rate in the first quarter. But this is misleading; most growth came from government spending and not from business expansion.

Actual first quarter growth—removing military and general government spending—was about 2 percent for manufacturers. This is the benchmark molders should use to estimate future growth.

The second half of 2002 is likely to see strong growth fueled by the three great pillars of the economy: housing starts, consumer spending, and automotive sales. It is important to note that in the recent shallow recession these three markets held up quite well.

But molders face another problem also: the high value of the dollar and the ensuing flood of low-cost imports. Will that change? Will molders be able to compete with imports again on a more effective basis? Most projections call for a continued strong dollar.

The Modest Recovery
We have consistently predicted that tangible recovery across the board will not be seen by injection molders until this summer. Probably by the time this issue reaches many of you, orders will have shown solid increases.

But it will be several months before capacity utilization reaches the level required for new machinery purchases. We see this happening by September or October. Based on January 2002 figures issued by the Federal Government, most manufacturers have capacity utilization in the low 80 percent range. This figure typically must hit 88 to 90 percent before manufacturers add capacity, overtime, and machinery.

Still, the first half of the year showed some growth. New orders for factory goods beat expectations in March, the Commerce Dept. reported in May. It said the value of new manufactured goods rose .4 percent to a seasonally adjusted $318.5 billion in March.

Despite March's overall increase, new orders for costly and long-lasting durable goods fell .5 percent. Orders for transportation equipment, which account for close to one-fifth of manufacturing business, dropped 1.3 percent in March after soaring 11.3 percent the previous month. Excluding transport, orders rose .8 percent. Excluding defense, orders rose just .1 percent in March.

In April, U.S. manufacturing grew for a third straight month, but at a slower pace. The Institute for Supply Management's monthly manufacturing index eased in April to 53.9 from 55.6 in March. The New Orders Index, a measure of demand for factory goods, fell in April to 59.0 from 65.3 in March, while the production index rose in April to 58.0 from 57.8 in March.

Supportive of general growth expectations was a report from the New York-based Conference Board, whose Index of Leading Economic Indicators inched up .1 percent in March to 112.3 after holding steady in February.

Productivity Miracle?
Worker productivity, a key ingredient to the economy's long-term vitality, shot up at an annual rate of 8.6 percent in the first quarter, the best performance in nearly 19 years. The jump in productivity followed a strong 5.5 percent increase in the final three months of 2001, the Labor Dept. said.

In practical terms, this means that U.S. molders produced more molded products without adding labor. Other Dept. of Labor data show that overtime in manufacturing in the first quarter shrunk as overall manufacturing employment dropped.

U.S. molders—many of whom equipped their factories with new and highly automated equipment in the recent economic boom—apparently can produce more products without adding labor. This is bad news for equipment suppliers: It will take substantial economic growth before capital investment jumps.

Strong Car Sales
Molders in Canada and northern Mexico remain the prime beneficiaries of strong automotive sales. U.S. vehicle sales increased 3.1 percent in April compared with April 2001. It was the first time this year that sales improved from the same month a year ago. With more than 5.3 million vehicles sold in the first four months of 2002, sales are down just 1.7 percent from the same period last year.

Less beneficial to molders is pressure from carmakers to cut prices even further, which shrinks already razor-thin profit margins. And the pressure on parts makers to consolidate is increasing, making it more difficult for small molding shops to retain a piece of the automotive business.

Also, data for the first quarter of 2002 show that import of automotive parts actually declined by 4.8 percent over Q4 2001. This means that more business went to domestic molders.

Electronics Returns to Growth
Another positive sign is that U.S. PC shipments grew in the first quarter, marking a turnaround after two consecutive quarters of contraction, according to research firm Gartner Dataquest. Domestic shipments rose 2.3 percent in the quarter to 11.1 million units, while worldwide PC shipments totaled 32.7 million units in the first quarter—flat from the same period last year.

As is the case with automotive parts and most electronics, the first molders to benefit from this return to growth are those in Mexico and Canada. Importers of computer components were also major beneficiaries.

PC sales have to grow at an annual rate of more than 7 percent before U.S.-based electronics molders see direct benefits. However, orders for new molds—imported and domestic—are up, signaling a wave of new product introductions later this year.

But it is more than just PCs. All types of electronics are staring to show signs of growth. Gartner Dataquest forecasts U.S. color page printer hardware shipments to grow 24.6 percent in 2002 to more than 315,000 units, up from 252,000 units in 2001. Similar growth rates are seen for color copier hardware and color page printers.

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