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Molders Economic Index: Good growth prospects for U.S. molders

Almost every bit of economic data for the past few weeks spells good news for U.S. injection molders. Very solid growth for most of the next 12 months should be anticipated. While specific industry-by-industry forecasts will be published in January IMM, this month’s report gives you the first mid- and end-year 2000 projections. As always, these projections are subject to revision.

Indicators of solid growth in injection molding output are not limited to macroeconomic reports. Data show increased sales of resins that are primarily injection molded, an upswing in imported injection molding machines, and a growing backlog for equipment makers. Molders, fully aware of what their order books contain, seem to be betting that capacity expansion is the way to go now.

One quick note of caution: Most of the future growth is concentrated in high-value-added applications with little or no growth seen for applications such as packaging. It is in those commodity markets—think of plastic drinking glasses or bottle caps and closures—where imports from Asia and Mexico are grabbing business away from U.S. molders.

Manufacturing Joins Boom
Continued boom times are generally anticipated with manufacturing finally becoming a full participant. Up until now service industries have been the prime beneficiaries. A lower value for the dollar, steady interest rates, a general pickup of trade in and with Asia, and slightly reduced exports to the U.S. add up to a favorable climate for manufacturers.

Don’t be confused by recent GDP data. U.S. GDP slowed to a 1.6 percent annual growth rate in the April-June second quarter—the weakest in four years since a .4 percent increase in the second quarter of 1995—well under a 4.3 percent growth rate in the first quarter. But inventory buildup, changes in trade patterns, and overall manufacturing strength have resulted in projections for a strong second half of 1999, boosting GDP growth back to a 3.5 to 4 percent range.

Among the data supporting this outlook are reports that show how August sales of new homes climbed 2.9 percent to 983,000, the second fastest pace on record. As reported before, continued strength in housing means solid future growth for appliances, furniture, and such simple components as injection molded pipe fittings. Note also that construction of new homes and apartments posted a .4 percent increase in August.

The same GDP report said consumer spending that fuels two-thirds of economic activity grew at an upwardly revised 4.8 percent rate in the second quarter. According to another report, U.S. factory orders for durable goods increased in August for the fourth month in row, led by aircraft and autos.

The strength in durable goods orders directly benefits the majority of injection molders whose products are incorporated in applications such as appliances or computers. Now, a recovery in demand for U.S. goods in Europe and Asia is further helping spur business. Just one small example: The Assn. of Home Appliance Manufacturers reported a 44.3 percent increase in air conditioner shipments in August and an overall jump in shipments of all types of major appliances of 10.5 percent for the first eight months of 1999. Growing export orders account for at least two percentage points of this gain. U.S. industrial production rose in August, the seventh straight monthly increase, led by a surge in output of autos and auto parts. Output increased .3 percent. Production had risen .7 percent in July.

Also significant, the plant-use rate, or industrial capacity put to work, rose to 80.8 percent in August from 80.7 percent in July, marking the highest rate since last November. Increased capacity utilization is the first step towards major new capital investment: Injection molding plants typically consider adding capacity when utilization levels hover around 80 to 82 percent for some time.

Manufacturing output rose .4 percent in August, led by the gain in automotive production, after rising .6 percent in July. At the same time other data indicate that the monthly increases in car part imports are abating. In plain English, this means molders serving the automotive market are finally likely to see healthy growth for the balance of the year, provided car and truck sales remain strong. All indications are that this will remain the best sales year in more than 20 years.

The Y2K Effect
Molders report stronger orders as retailers start building inventories to protect against possible supply interruptions due to the Y2K effect. While Y2K will boost many molders in 1999, it is likely to have major benefits in 2000. Take computers and consumer electronics. Many believed that the wave in new computer sales that dominated the past 10 months was driven by a need to replace computers before the dreaded date. This is certainly the case.

But recent surveys among U.S. business and consumers show that almost as much buying volume may be unleashed on the computer industry after the beginning of 2000. It is in January that people will “find out just what all didn’t work” and “they will have to rush to replace it,” one major PC assembler told us.

While the United States has spent billions to fix Y2K problems, “People will be surprised by how much is left to fix,” says a source in the U.S. Department of Defense, which is planning major acquisitions after Jan. 1. Solid data support this outlook. In July 1999—for the first time in 14 months—world chipmaking equipment sales increased, up a bullish 35 percent. This means that chipmakers believe that sales of semiconductors will be higher than ever in Spring 2000. And moldmakers report that new tool orders for advanced digital consumer electronics, smart home appliances, and cell phones—among others—are at an all time high.


The Molders Economic Index is prepared exclusively for IMM by Agostino von Hassell of The Repton Group, New York.

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