April 1, 2003
It will be a quick war and you will benefit
Molders surveying the latest crop of economic data and projections have a right to be confused. Key indicators point up one day and down a week later. Some forecasters anticipate a new recession while others confidently project strong growth later this year.
What it comes down to is simple: The North American economy was gripped in paralyzing indecision. Would there be war with Iraq? What would happen to oil prices? As Wall Street showed on the day our president addressed the nation, the start of war removed uncertainty. There will be up and down movements and oil prices may spike more. Our bet is that once the Iraq issue is resolved, solid and rapid growth will return, including the manufacturing segment.
The War â€œTaxâ€
The U.S. consumer has been paying a war â€œtaxâ€ of sorts for the past seven months and this is finally starting to show up in dismal data on consumer spending. February sales in department stores, car showrooms, and all spending segments except housing were down. The steady increase in oil pricesâ€”at the time of this report hovering around $40/barrelâ€”has reduced consumer spending power for the last 12 months by $106 billion dollars, according to data from the Federal Reserve. And derivative pricesâ€”such as gas and heating oilâ€”will stay high until the Iraq issue is resolved.
The reduction in consumer spending is hitting molders hard, particularly those who are making products such as small appliance parts, packaging items, toys and sporting goods, car parts, and consumer electronics components. Again, this will not reverse itself until the Iraq issue is resolved.
Here is a summary of key economic data that back up our statements above:
Manufacturing. While U.S. manufacturing activity grew for a fourth straight month in February, the pace of expansion slowed notably. The Institute for Supply Managementâ€™s (ISM) index of manufacturing activity fell to 50.5, slipping markedly from a January reading of 53.9. ISMâ€™s new orders index fell 7.4 percentage points to 52.3 percent in February, down from 59.7 percent in January. The groupâ€™s production index declined .9 point to 55.4 percent. E-mails we received show that many molders saw some increased output in February but also that many are uncertain about March and April.
Automotive. February car and truck sales tumbled about 7 percent in February to a seasonally adjusted annual rate of about 15.5 million. And the outlook is grim as the major car companies see the effectiveness of incentives fading. As a resultâ€”and this will impact automotive molders from Canada to Mexicoâ€”GM said it was estimating its Q2 production would run 10.5 percent lower than the same period last year. Ford also said that production would be down, yet did not provide a specific number.
Durable goods. In January durable goods orders jumped 3.3 percent, the best showing in six months, the Dept. of Commerce reported. While data for February will not be in for some time, we believe that the final report will show an equally steep drop in orders.
Inventories. Somewhat worrisome is an increase in inventories. In December 2002 companies boosted their stockpiles of unsold goods by a brisk .6 percent, the largest amount in three months. Combined with declining consumer spending, this likely means that in the near term retailers will act conservatively with new product orders.
Services. The services sector, which accounts for the bulk of the economy, expanded for a 13th straight month in February but at a more modest clip. ISM said its index of nonmanufacturing business fell to 53.9 in February from 54.5 in January.
Rising costs. Manufacturers are facing higher costs across the board. January saw the first significant increase in producersâ€™ prices, their fastest pace in more than a decade. Much of this 1.6 percent increase, according to the Commerce Dept., was due to energy prices. But even excluding volatile food and energy prices, the producer price index jumped .9 percent, the biggest increase since December 1998.
Increase in Electronics
Although much of the economic news is troubling, North American molders of components for computers, copiers, other office equipment, and consumer electronics have reported order increases since the start of the year. This suggests that the low rate of output growth may shift up, even though imports continue to expand.
Market research firm Gartner Dataquest projected during the winter that worldwide personal computer shipments will rise 4.8 percent in Q1. Even better growth is expected later this year: An increase in global PC shipments is expected by the end of 2003, rising to 138.7 million units, a 7.9 percent jump from 2002.
The housing market, at least for now, remains one solid bright spot. Some temporary declines in new construction as well as the purchase of existing homes is expected due to war fears, but for most of 2003 the housing market is expected to hold up very well.
This is great news for molders of furniture components, parts for large appliances, electrical items, and other items used in construction. Since most housing components are sourced locally, this segment of the molding market has not yet been affected by imports, enabling molders of plumbing components to continue solid output growth.
In January construction of new homes and apartments rose to the highest level in 16 years. The Commerce Dept. reported that work began on 1.850 million units at a seasonally adjusted annual rate in January, up .2 percent from 1.847 million units in December. In February, construction spending hit an all-time high.
Low Dollar, High Deficit
Adding to the economic worries is a rapidly expanding trade deficit. For 2002 the U.S. recorded a $435.2 billion trade deficit, the largest imbalance in history. This was up 21.5 percent from 2001, the Commerce Dept. reported.
Exports have not risen much as most global economies are showing slow or no growth. Economists had predicted an increase in exports as U.S. goods became more affordable with the generally lower value of the dollar.
By country, the U.S. ran up the largest trade gap with China, a deficit of $103.1 billion, marking the third straight year that the U.S. has recorded its largest trade deficit with that nation.
Agostino von Hassell of The Repton Group, New York, NY prepares this index. Contact him at [email protected].
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