It seems we are again in a mild manufacturing recession. This will not end until the uncertainty over Iraq is clearly settled.
As far as manufacturers and injection molders are concerned, all economic signs indicate that manufacturing—not anywhere near recovered from the 18-month downturn that ended early this year—is again experiencing a recession. The outlook is grim:
So where do we go from here? Is there any good news?
Manufacturing Activity Declines
Manufacturing contracted in September for the first time since January, according to an ISM report (Institute for Supply Management in Tempe, AZ).
This index of business conditions in factories fell in September to 49.5 from 50.5 in both August and July. The fall put the index just below the 50 mark, denoting contraction.
In August, the Federal Reserve said a significant decline occurred in industrial output. We predict that data for September will show yet another decline.
The ISM new orders index rose in September to 50.2 from 49.7 in August. But, still at a level near 50, it signals further sluggishness might lie ahead. A barometer of future production, the new orders index has fallen about 15 points from a peak of 65.3 in March.
Projections for the fourth quarter are mostly negative. For instance, Wal-Mart, which buys numerous products containing molded parts, warned that sales in the last part of 2002 would grow far less than anticipated. Other suppliers of consumer products have issued similar warnings.
The IMM Index shows declines also and we have sharply reduced our projections for growth by late this year and for the middle of next year. There will be some growth, but many segments of the injection molding market will show declines.
What Will Turn This Around?
Manufacturers and molders have been uncertain about the course of the economy for months now. This is reflected in the dearth of orders for new molding and auxiliary equipment. Initial data from the U.S. Dept. of Commerce show that overall capital spending by manufacturing companies has declined in the first six months of this year.
At the same time we see the first real signs that the all-critical consumer spending is slowing. Housing is off from its record levels. While sales at discount chains are still solid, premium retailers report declining sales. The disaster on Wall Street is now forcing many consumers to cut back, and that spending accounts for two-thirds of the total economic spending in the United States.
Uncertainty is the key. Wall Street is stalled within a very narrow trading range. Possible war with Iraq, turmoil in Israel, sharp economic declines in Latin America, and slow to no growth in Europe (mostly Germany) and Japan all add up to uncertainty.
When will this change? When will the North American economy—basically very sound—return to growth? We believe that once we see a clear decision regarding the possible war with Iraq, growth will resume. Once the consumer is comfortable again and knows where the country is going, spending will resume.
Recent Data Support This
In late September, the Dept. of Commerce reported the U.S. economy held up better than previously thought in the second quarter, but still suffered an abrupt slowdown compared to early 2002.
Gross domestic product rose at an annual rate of 1.3 percent in the second quarter, the Commerce Dept. said in its final GDP estimate.
In the first quarter, growth was a solid 5 percent on an annual basis. Growth in the second quarter was constrained by a modest 1.8 percent growth rate in consumer spending and a 2.4 percent drop in business investment in new plants and equipment.
In August, construction spending dropped to the lowest level in six years, the Commerce Dept. reported in early October. Housing starts fell 2.2 percent, the third monthly decline in a row, the government reported in late September. While still at historically high levels, housing is showing some signs of weakness.
Housing starts slid to a seasonally adjusted annual rate of 1.609 million units in August from a downwardly revised 1.645 million rate in July. Building permits, an indication of builder confidence, also tumbled 2.5 percent to 1.669 million units from 1.712 million units the preceding month.
August also showed a boost for the appliance and furniture sector of the molding market. This can be correlated to new home sales, which rose to a record level: single-family houses climbed 1.9 percent.
Orders for durable goods fell .6 percent after a downwardly revised 8.6 percent rise in July, the Commerce Dept. said.
What do we Project?
We do have some good news. The pressure to resolve the Iraq conflict is enormous, and this will benefit the molding industry. We believe that we will know which way the conflict will evolve before the year ends.
We foresee relatively slow manufacturing and molding output growth in 2003 of about 2.3 percent, reaching an annualized level of 3.9 percent late next year. For 2004, we see manufacturing growing at 4 percent or higher.
One bright light is all types of electronic products. Molders report higher order levels and also indicate that quoting activity has dramatically increased. Many new products are in this particular pipeline.
Global sales of semiconductors rose 2.2 percent in August from July, and 14 percent from August a year ago. According to the Semiconductor Industry Assn., the 14 percent increase in August, to $11.9 billion, from the same month a year ago was the first double-digit increase from the industry’s cyclical low in 2001—the worst year ever for the chip industry. Chip sales are a key indicator of future manufacturing activity in the production of electronics.
Agostino von Hassell ([email protected]) of The Repton Group, New York, NY, prepares this index. MEI is a record of production statistics, indexed to the base period of July 1994 as 100. In January 2001, we began tracking, for comparison, the Federal Reserve Industrial Production Index. Historical data is provided for both indexes, as well as for key markets.
