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The positive news is that molders can anticipate annualized growth of more than 2.9% for the next nine months. The negative news is that a combination of factors could push this growth rate down to levels as low as 2.6% per year.
The risk factors are a cooling housing market, the continued impact of high energy prices (even though they dropped in August), and spot weakness in new orders for consumer goods. Of these, housing requires the most attention and it will be some time before a real trend is apparent.
Slower output in August
U.S. factory activity expanded at a slower pace in August, according to data released by the Institute for Supply Management (ISM; Tempe, AZ). ISM reported that its index declined to 54.5 from 54.7 in July. Note that this very accurate gauge remains above 50, indicating expansion, yet now at a slower rate.
The Commerce Dept. this past August also reported that it revised Q2 economic growth upwards to 2.9%, which is still down sharply from the torrid first quarter, which came in at 5.6%. Current projections for Q3 and Q4 are 2.4% and 2.7% GDP growth (all data are on an annualized basis). Consumer spending, which accounts for about two-thirds of the U.S. economy, rose at a 2.6% annual pace in Q2 after a 4.8% surge in Q1 2006, the Commerce Dept. stated.
Housing trouble
In the second quarter, overall home construction fell at an annual rate of 9.8%, the Commerce Dept. reported. This was the biggest drop since 1995. Major home builders warn of declining profits and growing inventories of unsold homes.
Detailed reports are not good: The National Assn. of Home Builders (NAHB) and the Census Dept. released reports in late August indicating that housing has declined and will continue to fall.
Building permits issued in July were at a seasonally adjusted annual rate of 1.747 million units, a 6.5% decline from the revised June rate of 1.869 million and nearly 21% below the annualized rate of permits issued in July 2005 (2.206 million). Fewer permits means that over the next 10 months, housing activity will be substantially reduced.
Construction spending in July fell by the most since 2001, the Commerce Dept. reported recently. The 1.2% drop reflected the biggest decline in home building since January 2002 and came after a .4% rise in June.
Actual housing starts declined to 1.795 million, a 2.5% change from revised June figures and 13.3% lower than the July 2005 rate of 2.07 million. Single-family homes were completed at a rate of 1.665 million, a decline of 4.6% from June.
The Commerce Dept. reported also that July new home sales fell by 4.3% to a seasonally adjusted annual sales pace of 1.072 million units, down 21.6% from a year earlier. The decline was the largest since an 11.5% plunge in February.
U.S. molders in markets as diverse as electrical, electronics, appliances, furniture, and building components have had very strong years now, with average housing construction at more than 2 million units/year. We believe that the housing market will settle at a 1.9 million-unit rate toward the end of the year.
But molders across the board must anticipate declines in orders.
Little news in automotive
Each month in the past 13 brought the same news: Sales by U.S. suppliers are declining while Asian and German carmakers are grabbing an ever-larger share of the U.S. market. It was the same in August.
Toyota’s sales jumped 17% while Ford’s sales declined 12%. Overall, Asian carmakers now hold 41.1% of the U.S. market. Injection molders have followed this trend, boosting investment in new molding plants close to Asian assembly plants while shutting facilities close to the assembly plants of Ford, GM, and Chrysler.
Other sales data are mixed: Honda was down 3.2%, mostly because it could not supply enough Civics; Nissan dropped 2.7%; and Hyundai rose 6%. GM’s sales rose 3.8% and Chrysler saw sales decline by 4.2%.
Overall sales of new cars and light trucks were up .2% in August, with most of the gains coming from more fuel-efficient smaller cars, while light truck sales dropped 2.3%. For all of 2006 we anticipate car and light truck sales to come in at a slightly higher level than 2005. Molders benefit because sales of parts continue to increase.
Durable goods down
New orders for U.S.-made durable goods fell a substantial 2.4% in July because of lower aircraft and car orders, according to the Commerce Dept. Significantly—and in line with the reports on a cooling housing market—this was the first such decline in three months. Yet excluding the transportation category, durable goods orders rose a stronger-than-expected .5%.
Agostino von Hassell of The Repton Group ([email protected]; New York, NY) prepares this index.
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