Molders Economic Index: Molding activity resumes on a path to growth

We said all along that the painful drops in manufacturing and molding activity are cyclical but that overall we continue on a path of growth. By December 2007—or more likely January or March 200—when most data are available, we will see that this current year was yet another one of solid growth overall for molders.

What is solid? Cumulative growth above 3%. Still, numerous molders continue and will continue to struggle, overwhelmed by imports and unable to generate profits due to escalating transportation costs (high gas prices) and rising resin and commodity tabs. As in past years, some sectors of our molding economy will grow faster than others as the charts on these pages show.

It is hard to imagine such growth now. In April, data were released that showed that the U.S. GDP rose just 1.3% in the first quarter of the year. And business investment dropped for the first time in almost four years at the end of 2006 and rose at a 2% annual rate in the first three months of this year, the Commerce Dept. reported.

March and April improvements
Construction remains an area of concern. Housing starts and sales of existing homes remain spotty and nowhere near the levels seen in 2005 and early 2006. But signs of improvement abound.

For March 2007 the U.S. Census Bureau reported a .2% increase in construction spending as compared to February 2007, which also showed an increase over the prior month. Still, March 2007 spending remained 2% below the level seen in March 2006. It will take most of 2007 for construction and housing to rebuild solid growth patterns and that, in turn, will impact other sectors such as furniture, small and large appliances, electrical items for houses, and simple products such as molded pipe fittings.

What will boost manufacturing now in all sectors are increases in personal income, up .7% in March while spending only grew .3%. Thus, even with gas prices anticipated by some to hit $4/gal in some parts of the country, the consumer will have plenty left over to spend on all types of goods.

In April, so reports the Tempe, AZ-based Institute for Supply Management (ISM), the manufacturing index rebounded sharply to 54.7. This is the highest level in one year. The main reason for this as well as for higher orders is lower inventories: For the past six months most companies have worked at reducing inventories. Now, however, to meet consumer demand, new orders are a must.

The ISM new orders index for April jumped to 58.5, the highest since April 2006. For March, the Federal government reported that orders for all manufactured goods jumped 3.1% while durable goods orders, which are a key segment of overall manufacturing orders, jumped 3.4%.

A detailed look at the manufacturing orders and related data as released by the Dept. of Commerce also showed that orders for “nondefense” capital goods increased by 4.8% in March, the best such increase in 2.5 years. This category is generally seen as an indicator of capital spending plans by manufacturing businesses and probably will be reflected in the sales of injection molding machines and auxiliary equipment in the April-July time period.

Lower productivity gains

It is never a good sign when productivity growth slows. The Bureau of Labor Statistics (BLS) of the U.S. Dept. of Labor reported preliminary data for Q1 2007: In manufacturing, productivity changes were 2.7%, 2.7% in durable goods manufacturing, and 2.0% in nondurable goods manufacturing.

BLS also stated that the Q1 2007 productivity increase of 2.7% in manufacturing came as output increased 1.5% and hours of all persons fell 1.1% (seasonally adjusted annual rates). After revisions, manufacturing productivity increased 1.9% in Q4 2006, as output and hours decreased 2.1% and 3.9%, respectively. The 2.7% increase in durable goods manufacturing productivity in the first quarter was the smallest since a 1.1% rise in Q3 2004.

One simple result is that with higher labor costs yet lower productivity gains, more molders will struggle to maintain growth in profitability. In an ideal world, productivity gains should outpace growth in labor costs, which was the case for much of the past 10 years.

Rotten April car sales

Sales in April were so bad that even Toyota was affected: That company lost 4.4% in sales after having gained more than 11% in March.

The news from other carmakers was equally grim. Ford’s U.S. sales dropped 12.9%, GM’s sales were down 9%, Honda’s were down 9.1%, and Chrysler’s sales declined 10% for cars and 9% for trucks. It is hard to predict if this was just one very bad month or a sign of continuing troubles.

The shift of Tier One molding operations away from the three Detroit companies continues as Asian assembly plants remain on track for more expansion. The need to shift away from Detroit is obvious for molders: In the first three months of 2007 GM produced 192,000 fewer cars than in the same time period in 2006.

Yet some companies remain bullish. European Hella Behr Plastic Omnium, or HBPO (the company’s U.S. headquarters are in Troy, MI), an assembler of metal and plastic front-end modules for cars and light trucks, will open three assembly plants in North America in 2007. This will benefit local molders around Toluca, Mexico, Windsor, ON, and St. Louis, MO. This is one example. Numerous automotive molders serving Asian carmakers have added injection presses in the past months.

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