Molders Economic Index: Molding growth slower than GDP increase

Every set of economic gauges points up. The GDP jumped 8.2% in Q3 2003—a growth rate close to boom-economy China. November manufacturing output jumped solidly; car sales and appliance shipments in November jumped also.

“The U.S. economy is already growing in a way that appears broad-based and sustainable,” Atlanta Federal Reserve Bank president Jack Guynn said in early December. “The kind of broad-based and balanced growth I’m talking about involves steady contributions across a broad range of the economy, including households, businesses, exporters, and the government.” It all jumped. But here is one e-mail from a molder in Indiana: “I see all this economic news promising growth. My business is growing just 2% to 3%.”

The comment from this molder—who makes components for home appliances as well as electrical parts for the booming housing market—is typical of what many molders are telling us. Their actual growth rates pale in comparison to the torrid rate of GDP growth. Rapid growth is just not there—at least not yet.

The overall positive economic data do mislead. Less than 20% of the GDP is contributed by manufacturing. It is the service sector that is booming. Manufacturing plants are still stuck in a slow-growth mode.

It is also important to expect that the rapid GDP expansion seen in Q3 2003 is likely to have slowed in Q4 to about 4.3%.

When Will This Change?

We do not anticipate molding output to record growth rates greater than 3.5% to 3.8% in 2004. Some segments, such as medical molding, electrical, and electronics markets, will do better. But overall output growth will be modest as compared to sterling GDP performance data. Note here that the Blue Chip Economic Indicators in December said its poll of more than 50 professional forecasters found the consensus view for 2004 growth had risen to 4.2% from the 3.9% expected only recently.

What holds molding back is a variety of fundamental factors. And they will not change:

• While consumer spending is growing fast—as seen by very strong car sales in November and healthy 2003 holiday sales—not all these dollars go to U.S.-made goods. Imports are the main beneficiary.
• U.S. exports of molded products are growing at rates far less than 1.5% on an annualized basis. Our main markets—Mexico and Canada—have not yet seen the strong economic recovery that marks the United States. For instance, in Q3 2003, Canada’s economy grew just 1.1%.
• U.S. exports of molded products to Asia, Latin America, and Europe are growing very, very slowly. But the export of manufacturing facilities to Asia primarily is continuing at a rapid clip.

The Current Economic Outlook

Molders should feel reassured, however, that the growth they are seeing now appears to be sustainable over the next 12 months and beyond. In many ways, the relatively modest growth—compared to the levels set in the boom 1990s—is reliable and predictable and will allow molders to plan with some accuracy in terms of capital spending or possible expansions.

What Makes the Growth for Molders Sustainable?

In November, all manufacturing plants showed the quickest growth since 1983. In early December, the Institute for Supply Management said its barometer of manufacturing activity surged to 62.8 in November from 57 in October. A reading above 50 indicates expansion, while one below 50 indicates that manufacturing activity is slowing.

More importantly, the Institute’s index of future orders jumped to 73.7 from 64.3, while the employment index climbed to 51 from 47.7. In October—and this supports the data for November—overall output at U.S. factories, mines, and utilities rose for the fourth straight month, the Federal Reserve said. Industrial production increased .2% after a revised .5% gain in September. The Federal Reserve also reported that factories operated at 75% of full capacity in October, the highest pace since 75.4% in February and up slightly from September’s 74.9% rate.

The growth in orders is in line with recent reports on new orders for durable goods as well as all types of manufactured products. New orders for durable goods jumped by 3.3% in October. Orders placed now typically translate into expansion for molders five to six months down the line.

Molders in a variety of markets—housing products, appliances, electrical parts, and furniture—can also rely on continued strength in the housing market. Construction spending jumped .9% in October, setting a new record for a fourth straight month, as low mortgage interest rates pushed home building to unprecedented levels. Overall construction spending rose to a seasonally adjusted annual rate of $922 billion from an upwardly revised $913.5 billion in September, the Commerce Dept. said.

For October 2003, the Commerce Dept. reported that builders broke ground on 1.96 million units, at a seasonally adjusted annual rate, representing a 2.9% increase from September’s pace.

Even though local content (i.e., U.S., Canadian, and Mexican-made automotive parts) continues to decline to an overall level of less than 69%, strong car and truck sales in November and in early December are likely to boost the fortunes of automotive molders.

In November 2003, GM saw sales jump 22% from November 2002. Overall car and truck sales jumped more than 8% in November to an annualized rate of 16.8 million units. Yet many of the gains went to imports.

However, foreign suppliers such as Honda, Toyota, BMW, and Mercedes are boosting output at U.S. assembly plants, benefiting North American molders.

Strong Productivity Growth

Productivity of U.S. companies jumped at a 9.4% annual rate in Q3, the best showing in 20 years. This was up from the 7% growth in Q2 2003, according to the U.S. Dept. of Labor. Economists do debate just how meaningful productivity improvements truly are. But the majority seems to agree that stronger productivity, in part due to increased use of automation in manufacturing plants, allows manufacturers such as molders to reduce labor costs and boost profits. Click here, for Web-exclusive leading economic indicators for injection molding and import/export data.