This early in August there can be little doubt that the U.S. manufacturing economy is slowing down. Multiple rate increases as well as some changes abroad combine to reduce the rate of economic growth overall and in particular the rate of economic growth in manufacturing.
Should molders prepare for a slow second part of this year and possibly an even slower 2001? We believe that most molders will see relatively little change over the next six to eight months. With the exception of automotive (with stronger than anticipated growth) U.S. injection molders can anticipate sustained growth as if the Federal Reserve had not raised rates at all.
Why, then, will molders do well while the overall economy slows down? Some of this can be explained by timing. Injection molded parts are typically produced three to four months after an order for a major product has been received. For instance, a new order for a large medical diagnostic device placed in June 2000 will call for molded parts in October 2000. In general, many orders for injection molded parts lag economic patterns by three to four months—even longer in the case of housing and furniture, typically six to nine months. As a result, a temporary slowdown in the economy now will not show up in molders’ order books until late 2000 or early 2001.
But will that slowdown materialize then? It is very likely now that other unanticipated orders will sustain growth even when domestic demand for molded parts slows. And the keys to this are reduced injection molded parts imports and a strong increase in exports as key economic engines around the globe pick up steam—Japan and Germany show solid growth.
Numerous molders we spoke to during NPE 2000 confirmed this. Some have already seen 10 percent jumps in export orders, particularly for high-value molded items such as parts for medical machinery, office equipment, and appliances. And, surprisingly, two molders of drinking cups reported to us that their export business is booming.
How can a U.S. molder compete on a global basis in a commodity item such as drinking cups? Productivity here is the key. Massive investment in advanced molding machinery and downstream equipment has allowed more and more molders to compete on a price basis with molders in low labor countries such as Mexico or the Philippines. Said one molder of cups and cutlery, "In the past five years we have been able to reduce direct labor costs by 85 percent, all through automation."
Reviewing the Economy
U.S. manufacturing expanded in June at the slowest pace in 17 months as exports and production cooled. The National Assn. of Purchasing Management (NAPM) said its monthly factory index fell to 51.8 in June from 53.2 in May. That’s the fourth straight monthly drop for the index, which is now at its lowest level since January 1999, when it was 49.9. With a reading above 50, the NAPM report shows manufacturing expanded in June for the 17th month in a row. What this means is that growth is slower—but there is still growth.
At the same time, government figures showed construction spending across the U.S. rose in May, led by an increase in industrial facilities and other nonresidential structures. Spending rose .1 percent in May to a $809.3 billion annual rate, the Commerce Department said. And to illustrate how reports of slowdowns can be misinterpreted, spending is up 6.6 percent compared with the same month a year ago.
The reports also showed that the pace of new housing construction fell for the third month in a row, down .1 percent to 1.027 million units in May. Housing completions tend to lag reports of construction starts on new houses by about six months. Builders last year completed 1.636 million homes, the most since 1.669 million were finished in 1987. We now anticipate a minor dip in output of molded products for housing and furniture in October and November of this year. Appliance part shipments will show little change as export demand will cover any shortages in domestic sales.
At NPE 2000 several molders who provide goods for the housing and furniture markets said that they see additional growth as a result of novel applications. How much this will mean to overall growth patterns is hard to estimate now. But this is yet another case where new plastics applications create overall growth even when demand for traditional molded products slows.
Other data show that through May 2000, imports of manufactured goods—including such plastics-intensive categories as car parts—are down 3.5 percent compared to May 1999. And, even more important to U.S. molders, exports of manufactured goods—mostly with Asian destinations—have jumped 6.8 percent on a year-to-year basis. Later this year we anticipate solid export growth with destinations in Europe as the economies there pick up steam.
Even though there have been signs of slowdown, new orders poured into U.S. factories at the strongest rate in 71/2 years in May 2000. That will boost processors’ fortunes later this year. The Commerce Department said orders to U.S. factories for all types of manufactured goods shot up a stronger-than-expected 4.1 percent to a seasonally adjusted $385.77 billion. That more than recovered a 3.8 percent decline in April orders. It was the strongest monthly increase in factory orders since a 4.9 percent jump in business in December 1992 and reflected increased demand for electronic products including semiconductors, airplanes, and chemicals.
Specifically, May factory orders were boosted by a 26.4 percent surge in demand for electronic and electrical equipment to $46.6 billion. It was the biggest increase in orders for these products since August 1997 when they jumped 34.9 percent.
Strong June sales from Japanese, German, and Korean automakers resulted in a .7 increase in automotive sales. Molders benefit—even though many of these cars are imported, local content on most imported vehicles has risen to an average of 31 percent. Overall the U.S. new vehicle market finished the first half of 2000 up 6.3 percent to 9.1 million light duty units, putting it more than halfway to last year’s record-setting mark of 16.9 million. We now believe that overall 2000 sales will equal 1999 sales. Demand from U.S. companies for automotive parts is rising faster than sales as imports are reduced. Accordingly we have adjusted year-end growth projections up.
The Molders Economic Index is prepared exclusively for IMM by Agostino von Hassell of The Repton Group, New York.