For now, almost any economic projection for North America and the world is going to be uncertain at best. The impact of the terror of Sept. 11, 2001 is hard to measure but voices across the country say that in the near term the economy will not find the desired ground for a recovery.
A major recession is a real possibility. Sept. 11 created a massive change. Up until now all the signs we saw were for a solid increase in orders to molders. And molders had already reported significant improvements in markets. Our survey of moldersâprior to Sept. 11âshowed that in several key injection molding markets optimism had returned, bolstered by increased orders and sharply higher requests for quotes. Here are some comments from the field:
â¢ Several moldmakersâone from Taiwan, one from Canada, and one from Portugalâsay that actual orders for new molds with delivery prior to the end of the year increased sharply in August and early September. The Taiwanese moldmaker said that orders increased by almost 54 percent compared to the average volume in the first part of the year. The industries for which these molds are being made include household goods, large appliances, electrical products used in housing, and automotive parts.
â¢ An injection molder in southern Indiana said that orders for automotive partsâboth for OEMs and the aftermarketâhave increased lately by 11.5 percent compared to the first eight months of 2000.
â¢ A molder of medical disposables in Oregon said that it will install eight additional machines late this year to handle solid growth in business.
That was then. But what about now? We believe that in the short term the key pillars for the U.S. economy will suffer. Consumer spending for September will be sharply down and that may last into October.
As our nation goes on a sustained war footing, consumer spending will suffer, dragging down car sales and sales of major appliances. Even the housing marketâanother pillarâis in doubt. Additional interest rate cuts by the Federal Reserve are unlikely to have any short-term benefits.
It is All Speculation
It is impossible to gauge just what will happen now. The only comparable experience this country has is the economic upturn that came with World War II and again with the sustained economic growth created by the war in Vietnam.
Will the U.S. economy experience such an upturn? It is likely. How soon will you see benefits? Nobody knows at this time. Accordingly we lowered our estimates for midyear 2002 growth.
Which market segments will benefit now? We believeâbased on what senior economists in the Office of the Secretary of Defense tell usâthat molders in the following markets will see increased orders from the shift in national priorities:
â¢ Disposable medical supplies.
â¢ Small household appliances.
â¢ Parts for large trucks, certain types of airplanes, and utility vehicles used by the military.
â¢ Specialty parts manufactured for the militaryâhigh value added yet with relatively low production runs.
â¢ Electronics, in particular components that harden electronics for use in unpleasant environments.
One other key result of the terrorist-induced catastrophe will be a sharp decline in imports of low-cost parts. In simple terms, major suppliers of low-cost plastics parts such as China may see their sales to the U.S. decline. Much of this will be caused by China's already clear position that the United States shouldn't be too aggressive going after state sponsors of terrorism such as Iraq, Iran, Libya, and Afghanistan.
The Signs of Recovery
We had significant evidence of a recovery in early September. Even though the world has changed since then, it is important to review this. The basic U.S. economy remains very sound and even with a six- to nine-month effort to eradicate terrorism, the basics of growth remain.
For instance, manufacturing activity declined for the 13th consecutive month in August, but at a significantly slower rate. The Tempe, AZ-based National Assn. of Purchasing Management announced that its index of business activity rose to 47.9 from 43.6 in July. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction.
"The rate of decline decelerated significantly during the month," said Norbert J. Ore, who oversees the monthly survey. "Both production and new orders made marked improvement and recorded impressive growth after a lengthy period of decline, providing encouragement that a number of industries are starting to recover."
Confirming direct reports from molders, NAPM said that new orders rose to 53.1 from 46.3 in July. That equates to the first sign of growth in new orders after 13 consecutive months of decline. In addition to the new orders reading, indices measuring production and new export orders moved into growth territory. Backlogs of orders, inventories, employment, and imports all continued to show contraction, but at slower rates, according to the NAPM. Of the 20 industries tracked by the association, seven reported growth. They were leather, food, printing and publishing, glass, stone and aggregate, furniture, paper, and fabricated metals.
One of the main reasons for the lower estimate of second-quarter GDP is that companies liquidated their inventories more than the government previously thought. Inventory reduction was valued at $38.4 billion in the second quarter, the biggest decline since the first quarter of 1983. That subtracted .4 percentage point from GDP. But this is also very good news: Lean inventories will make an expansion in manufacturing activity so much more likely. Said a major retailer of consumer goods, "Our inventories are the smallest in seven years and we will have to build them up as we go into the holiday season."
Battered by weak sales and plunging profits, U.S. companies reduced such investment in the second quarter at a rate of 14.6 percent, the worst showing since the second quarter of 1980. The new estimate was weaker than the 13.6 percent rate of decline previously estimated. Note that for the first six months of 2001 the total value of imported injection machines declined by about 27 percent.
And low inventories are key now for U.S. molders. Basic domestic demand will continue to grow. Consumer aversion to imports will rise, in particular to products from China and other places. A Wal-Mart sales executive at the Wal-Mart in Winchester, VA told us that buyers rejected plastic flagpoles with a "Made in China" mark.
Other such anecdotes confirm this: Also in Winchester, employees at Toys-R-Us said that two people returned GI Joe toys that carried the "Made in China" label.
|(Base: July 1994 = 100) Performance of Injection Molding Markets Making Up the Index|
|Major Injection Molding|
|Building & Construction||9.05||135.33||135.23||134.92||134.15||133.57||132.81||132.94||133.08|
|Furniture & Furnishings||5.10||126.55||129.39||126.74||128.09||126.99||128.35||128.73||129.64|
|Consumer & Institutional||27.48||123.45||124.85||122.22||123.60||120.99||122.37||123.47||125.07|
|Industrial & Machinery||6.50||126.22||125.59||123.69||124.33||122.46||123.09||123.95||124.08|
|The Overall Index||100.00||132.01||133.34||132.26||132.04||130.85||131.91||132.37||133.62|
Agostino von Hassell of The Repton Group, New York, NY, prepares this index. Contact him at [email protected].