July and August brought high temperatures, much higher oil prices, higher resin prices, more orders for processors, and more export orders of molded parts.
But other factors were low: Q2 GDP growth moderated sharply to just 3%; overall new orders for all types of products are down; and consumer spending is down.
What does all this mean for processors? This current growth pattern of the North American economy is everything but straight—each month changes the short-term outlook. Early fall may even bring some further slowdown in growth, but long-term growth will continue for the next year or more.
How Should Processors Plan?
September is the month when most molding companies will start planning for 2005. It is the first attempt to gauge future orders, requirements to expand or not to expand production capacity, hiring plans, and what it will truly cost to mold parts. Here is some guidance:GDP growth will accelerate to 3.5% in Q4 2004 and will hold at about 3.5% to 3.8% for most of 2005, regardless of who wins the presidential election in November. New orders will be weak in September but should pick up in October. High-quality, ultralow-tolerance parts will have the most growth. K 2004 will be a great opportunity to scope out new cost and labor savings in highly automated production systems—complete systems that combine materials handling, molding, inspection, some assembly, and even some decorating. The dollar value will remain low. Imported molding machines will continue to be very affordable and import pressures—mostly from Europe—will lessen even more. The latter is of particular benefit for molders in the high-value-added business of making precision components for housewares, small appliances, medical devices, and some office equipment. Key global economies—Japan, India, and China—will see dramatic growth rates in the rest of 2004 and into 2005. We see industrial output in Japan growing by 6.8%, in India more than 10%, and in China, which is trying to rein in a boom economy, at least 12.5%. What helps North American molders is that Chinese and Indian domestic demand for products lessens the pressure in these countries to export at ever-lower prices to the United States.
Economic Reports: Up and Down
Here are the data and developments that are behind our projections. In some ways the e-mails and calls from molders are the most informative: improved profitability, solid new orders, and new equipment orders—all positive indicators.
The U.S. expansion is believed to be “self sustaining,” as Fed chairman Alan Greenspan testified in late July. But what may sustain this economy even more is the solid growth in Asia—an increasingly important market for molders and other manufacturers.
So what happened? U.S. manufacturing expanded in July for a 14th straight month and employment in the factory sector was still on the increase, according to the report released by the very reliable Institute for Supply Management (ISM) in early August. ISM reported that its index of national factory activity rose to 62 in July from 61.1 in June. Keep in mind that this index hovered around 50 just two years ago.
While activity is up, other gauges are down. Consumer spending accounts for about two-thirds of the economy and any changes are a sign of concern. For June the Commerce Dept. reported that consumer spending dropped by a sharp .7% from the previous month. The retrenchment came after consumers splurged in May, ratcheting up spending by a strong 1%. Americans’ incomes rose by .2% in June, down from a solid .6% increase the month before. The main culprit: high gas prices.
Consumer spending on durable goods declined by 5.9% in June, compared with a 3.7% rise in May. For nondurables such as food and clothes, spending dipped by .3%, following a 1.4% increase. Spending on services rose by .2%, down from a .3% increase.
Orders for long-lasting durable goods rose by much less than expected in June, but the previous month’s decline was halved, Commerce Dept. government data showed in early August. The Commerce Dept. said orders for big-ticket items rose .7% after shrinking .9% in May. May’s drop was revised from a 1.8% decline.
Transportation equipment gained 4.2% and capital goods rose 4.1% in June, but many of the other categories were subdued, with computers and electronic products retreating by 1%.
Housing remains strong but cooled somewhat. The Commerce Dept. said June outlays for construction decreased .3% to a seasonally adjusted $985.16 billion annual rate. May construction spending was also revised to a .1% gain, from a previously reported .3% advance.
Indicative of the impact of reduced consumer spending, higher mortgage rates and high oil prices drove down residential construction spending .6% in June, the first decrease since February 2003. June’s decline was the largest monthly drop in residential outlays since a 3.7% drop in January 2002.
Strong Growth Indicators
Molders can take heart from other data that suggest the June and July slowdown will only be temporary.
Data from computer and major appliance makers suggest a solid increase in orders. What’s more, computer makers have started to shift some manufacturing and parts sourcing back to the United States.
Automotive has been a mixed picture for most of 2004. Sales by U.S. car firms—GM, Chrysler, and Ford— have been down, while importers or foreign-owned assembly plants have shown record sales increases.
In July the slowdown in sales for GM moderated sharply (the company is still down but encouraged by the reduced pace of the declines), while Ford still came in with a sharp decline.
Key for molders in this market is that firms such as Honda, Toyota, Mercedes Benz (in Alabama), and BMW (in South Carolina) are reducing reliance on imported automotive parts and giving more business to U.S., Canadian, and Mexican molders.
How much new business? Specific data are hard to come by. One Japanese car firm indicated that, by the end of 2004, local content (parts sourced from Nafta firms) will jump to 67%, up from 62% in 2003. By the end of 2005 that same carmaker—one of the largest foreign-owned operators—hopes to have Nafta content exceed 71%.
© Agostino von Hassell of The Repton Group, New York, NY, prepares this index. Contact him at [email protected].