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Molders Economic Index: The low dollar helps for the short term

The very weak value of the dollar has, at least for now, helped boost exports of manufactured goods from the United States to all parts of the globe. However, exports to Europe have seen little growth; the stagnant economies there have reduced consumer demand.

U.S. molders across the board have benefited from the boost in exports and will likely see significant increases over the first half of 2005. U.S. exports grew at a 6.3% rate in Q3 2004. One key is that China is becoming a major importer of U.S.-manufactured goods. Yet the basic trade imbalance with China—five times as many imports into the United States compared to exports to China from the U.S.—will probably not change much in the first part of 2005.

But will the dollar stay weak? It is unlikely. European manufacturers are already clamoring for policy changes to reduce the value of the euro. China may very well allow its currency to start floating upwards in value in 2005. This, and the solid economic boom in the United States—Q3 GDP growth was revised upwards to a 3.9% annual rate—will ultimately force the dollar value up along with U.S. interest rates.

But even then, there is a benefit: Oil prices will likely slide further, giving both injection molders and consumers a much-needed breather.

Where Do You Stand?

Solid consumer spending late in 2004 will boost orders to manufacturers, as retailers and others are eager to replenish inventories.

The substantial holiday spending splurge is only the latest event boosting orders for goods. In Q3 2004 alone, consumer spending jumped 5.1%. Capital spending was also up sharply. Business spending on equipment and software grew at a sizable 17.2% annual rate in Q3—up from Q2’s 14.2% pace.

Also in Q3 2004, business profits jumped 8.1% compared to the same period in 2003. Manufacturing business saw profits rise 7.9%, helping fuel additional capital spending. Q4 2004 will also show solid growth. We project an annualized growth of more than 3.5% and about 3.7% in Q1 2005.

Strong Manufacturing Growth

Manufacturing expanded in November for the 18th straight month. The Institute for Supply Management (ISM) said its main index for measuring industrial activity rose to 57.8, a full point above October’s level. A reading of 50 or more in the index means the manufacturing sector is expanding, while a figure less than 50 represents a contraction. The index has been greater than 50 since June 2003.

ISM said new orders for manufactured goods and indicators of employment improved, but it also noted “significant upward pressure” on prices to manufacturers. One problem here is energy prices that affect all aspects of manufacturing.

“It appears the manufacturing sector is definitely sustaining its momentum,” said Norbert Ore, who oversees the report. “Prices are a big issue, but the strength in new orders offsets some of those concerns as companies work to benefit from the volume.” Indicators for new orders and employment improved compared with October, the ISM reported, while the backlog of orders decreased and inventories of manufactured goods remained low.

Growth in Housing

Housing starts jumped a larger-than-expected 6.4% in October to the busiest pace since December 2003, suggesting that spending on housing-related products will remain strong through the first half of 2005.

Housing starts climbed to a seasonally adjusted annual rate of 2.027 million units in October from a 1.905 million rate in September, the Commerce Dept. said. The October gain erased a 5.6% drop in September.

Our own survey of injection molders in North America shows that new orders for all types of housing-related products (such as furniture, electrical fixtures, window and plumbing hardware, and downstream products such as appliance components and furniture) have continued to expand.

Changes in Automotive

The drastic realignment among molders supplying automotive assembly plants continues. In simple terms, molders (many with manufacturing plants in the southern part of the United States and Mexico) will continue to boost output to meet the requirements of Asian assembly plants.

In the meantime, molders who have long depended on the Big Three in Detroit will see sharply reduced orders in the first months of 2005 along with massive pressures to cut prices. Few dare to say out loud what has been obvious for some years now: Detroit’s General Motors, Ford, and DaimlerChrysler are likely to keep losing market share. Where is the bottom for the classical U.S. carmakers? Nobody knows.

November was yet another month of grim data for the domestic makers: The nation’s two largest automakers said they would reduce production in Q1 2005 after reporting weak November sales. GM said in early December that its total vehicle sales fell 13.1% from November 2003, with a 17.1% decline in cars and a 10.3% decline in trucks. Ford Motor Co. said car sales fell 12.5%, while sales of pickups and SUVs were down .9%. Toyota Motor Co. and Nissan Motor Co., meanwhile, posted record sales for the month.

The drop in trucks and SUVs hurts. They have long been the most profitable vehicles for Detroit and also major consumers of molded parts.

The planned production cuts are severe. Ford will reduce production to 930,000 vehicles in Q1 2005, down 7.7% compared to Q1 2004. About 65% of the automaker’s 78,000-unit decline will come in the truck segment.

GM will cut production by 95,000 units to 1.25 million vehicles. That’s down 7.1% from Q1 2004. And 54% of GM’s production trims will come from the truck segment.

The situation is different at Chrysler. The company announced in December plans to idle several assembly plants in 2005 to decrease inventories and allow factories to prepare for the production of new models. Chrysler’s U.S. sales were up 3.2% in 2004 (through November) in a flat overall market, but ended November with a surplus of 68,000 vehicles.

Agostino von Hassell of The Repton Group, New York, NY [email protected],, prepares this index. MEI is a record of production statistics that is indexed to the base period of July 1994 as 100. It also gives year-end projections. In January 2001 we began tracking, for comparison, the Federal Reserve Industrial Production Index.

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