The economic data released late last year present a mixed picture but support what we have been reporting for several months. The market for injection molded products in the U.S. will remain very strong in 2000, showing solid growth in almost all sectors. But it will feel quite different this winter.
The latest crop of data support our forecast of a relatively sharp drop in new orders for injection molded products for at least the first six weeks of the new year. But the fundamentals of the U.S. economy will reassert themselves and molders will resume growing. The temporary slowdown is due almost entirely to sharp inventory growth in late 1999.
We believe that the recent interest rate increases will continue to slow key markets such as housing and automotive. However, both sectors as well as overall consumer spending will continue to grow in 2000.
One major West Coast molder of computer components such as keyboard parts and housings reports that new orders dropped almost 22 percent in November 1999 as the impact of the earthquake in Taiwan forced computer assemblers to reduce output; a temporary chip shortage is to blame. This molder also says that for all of 1999, total sales of products—85 percent of which are injection molded—rose 17.8 percent.
The same molder also says that a poll of customers—major computer companies such as Dell and Compaq—indicates that parts orders will decline in January and February. “We will see no growth in the first few months of 2000,” the molder reports. But beyond that, growth will resume and the company anticipates 2000 sales to exceed 1999 results.
Making Sense of the Data
The majority of the economic reports are, to say the least, bullish. Third quarter economic growth barreled ahead at a 5.5 percent annual rate. And the fourth quarter of 1999 will probably come in at a 3.8 to 4.2 percent annual rate. The IMM Index shows a similar increase with injection molders overall enjoying solid growth. The major exceptions to this growth pattern were toys (including products such as sporting goods), automotive parts, and industrial machinery components. All these, injection molders say, have been growing slower than other molded products, mostly due to higher imports, and, in the case of industrial equipment, a slowdown in capital spending.
Of critical importance is that this rapid growth has come with no inflationary pressure. Rather, the reverse: Productivity grew in the third quarter of 1999 at the fastest rate in seven years, while labor costs declined. Productivity, defined as the amount of output for each hour of work, rose at a 4.9 percent annual rate from July through September 1999, the Labor Department reported. This was a major change from the second quarter, when productivity growth had slowed to .6 percent. Another sign of healthy growth was the report late last year that capital spending on new plants and equipment has started to recover, rising at a 13.3 percent annual rate in Q3 1999.
But that increase is somewhat misleading. Capital spending—and this applies to many sectors of the injection molding market—had declined sharply in the January 1998 through June 1999 period as the mini recession in manufacturing hit. So this increase comes from very depressed levels. Metalworking equipment sales have declined about 18 percent from January 1999 to September 1999. On average, over the past five years capital spending growth is just below actual economic growth. Many injection molders have spent heavily in the past few years to expand and upgrade capacity, and this will resume in 2000. New machinery and advanced manufacturing technology are essential to productivity growth.
So where are the negative signs? New orders at U.S. factories declined in October for the second consecutive month on lower demand for electrical equipment and engines, the Commerce Department reported in December 1999. Orders fell .2 percent to a seasonally adjusted $360.0 billion after dropping a revised 1.0 percent in September 1999. Factory orders are a leading indicator, used to project manufacturing output three or more months into the future. In other words, while output at factories is high now, it is likely to show a decline three months down the road from October 1999.
One of the key factors impacting factory orders is the rising value of the dollar, making exports more expensive. And exports—particularly for molders of medical products, consumer appliances and electronics, and office equipment—have given many U.S. molders an additional push towards growth.
Factory orders for nondurable goods increased 1.0 percent in October 1999 after a decline of .3 percent in September 1999. These are orders for items often with little or no lead time, such as injection molded dinner plates for parties, drinking cups, one-time use medical supplies, or caps and closures.
Automotive: Good Sales
Strong automotive sales do not yet translate into a corresponding increase in molded automotive parts. Most automotive molders we spoke to for these reports have seen little or no growth in 1999.
The reason: Sharp increases in imports of all types of automotive parts have hurt domestic parts makers. We believe that growth will return as Asia’s economies continue their recovery. This will reduce the pressure to export automotive parts to the United States.
Car and light truck sales are likely to decline somewhat from the record levels set in 1999. November 1999 data support this view: While Ford Motor Co. posted stronger U.S. November light vehicle sales, General Motors saw its market share sink to a historic low as foreign automakers gained more ground. In November 1999, total U.S. sales rose 7.4 percent to 1,274,389 units.
The Molders Economic Index is prepared exclusively for IMM by Agostino von Hassell of The Repton Group, New York.