Molders Economic Index: A confused collection of data puzzles

Economic data from early February are almost the result of an orchestra that seems to have lost its notes: Nothing is in sync.

Housing starts and unemployment were down in December while interest rates rose and January manufacturing showed weakness. Yet export data showed some strength in contrast to a weak 2005 GDP report. New factory orders are up. What does all this mean?

Bottom line: There is little to worry about. Molders should remain optimistic for continued expansion in most of 2006, even though on a month-to-month basis the economic orchestra will deliver some unpleasant dissonance.

Past development

The most recent developments are reported here along with our quick analysis of what they mean.

• The Commerce Dept. reported that December housing starts fell 8.9% to an annual rate of 1.933 million units, led by a decline in construction of single-family homes. Some observers blamed cold temperatures while others say the long-anticipated decline in housing is now at hand. Is that truly the case? It will take several months to know for sure. For the year as a whole, starts rose 5.6% to 2.065 million units—the second-highest on record.

We believe housing will recover: Strong employment and population growth will fuel demand, but it may be for smaller homes. Molders have a built-in order backlog of at least six months, and maybe as much as nine months. A shift to smaller houses will, however, mean a reduction in the use of plastics per house. In contrast, the sharp increase of alternative energy systems (for example, solar panels, also for retrofit) is fueling new housing-related market opportunities for primarily U.S. and Canadian molders.

• A late January report suggests a robust labor market, which may translate into even more interest rate hikes in April; new claims for unemployment benefits fell unexpectedly to the lowest level in nearly six years.

• The Philadelphia Federal Reserve reports that factory growth nearly stalled in January, with its business activity index sliding to 3.3 from 10.9 in December, the weakest reading since last June. In contrast, the more reliable Institute for Supply Management (ISM; Tempe, AZ) reported in early February that “economic activity in the manufacturing sector grew in January for the 32nd consecutive month, while the overall economy grew for the 51st consecutive month.”

Norbert J. Ore, chair of the ISM survey, says, “The manufacturing sector had another good month during January as measured by the ISM data. Both new orders and production remain relatively strong, and the panel of respondents is generally upbeat about their business. It appears that the sector has recovered from the disruptions and dislocations caused by the hurricanes in the Gulf Coast.”

• ISM’s New Orders Index grew in January with a reading of 58. The index is 1.1 percentage points lower than the seasonally adjusted 59.1 registered in December, and January is the 33rd consecutive month the index has exceeded 50%.

• ISM’s New Export Orders Index for January registered 58.5, an increase of 4.2 percentage points when compared to December’s seasonally adjusted index of 54.3. This is the 38th consecutive month of growth in export orders.

• The economy grew at only a 1.1% annual rate in Q4 2005, the slowest pace in three years. The Commerce Dept. blames energy costs. This was down from 4.1% in the third quarter.

Strong export growth

The U.S. trade deficit in November 2005 (it takes months to have these data assembled) showed a sharp contraction for the first time. The detailed figures confirm what we have heard from molders: Exports of manufactured goods are up sharply in many areas. Even though aircraft exports dominated the figures, the Commerce Dept. reports that recoveries in Japan’s and Germany’s economies have allowed U.S. molders finally to start selling high-value-added products at much higher rates abroad.

Top performers include specialty electrical and electronics products, medical diagnostics devices, and even some business equipment. Based on past trade cycles, this trend should continue for several quarters.

Detroit surprise

Will this continue? Nobody knows, but January 2006 was a massive surprise for automotive molders and for Detroit’s traditional carmakers, which reported an overall and utterly surprising jump in car sales for the month.

Battered GM saw car sales rise 6%, ailing Ford was up 1.9%, and the Chrysler Div. was up 5%. Overall car sales for all U.S. automakers jumped 7.6% thanks to even higher sales gains among Asian transplants, but the result was lost market share for Detroit’s Big Three.

Agostino von Hassell ([email protected]) of The Repton Group (New York, NY) prepares this index.