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Steady growth brings little joy

While U.S. plastics processors might not always get what they want, recently they at least seem to be getting what they need...more of the same.

The most recent economic numbers offer few surprises; again most of the major indicators continued to signal growth in September, but as has repeatedly been the case, said growth has occurred at a less-than-enthusiastic pace; a concern that hasn''t exactly been allayed by the U.S.''s increasingly troubling trade imbalances.

This sluggish growth can be largely attributed to several new and interconnecting variables including China''s rapid industrial expansion, the lasting impact of Sept. 11-and the subsequent war on terrorism, not to mention the intensifying Iraq conflict-and rising global energy prices.

Although these factors have acted as a drag on the recovery, we don''t yet feel that their impact will be sufficient to derail U.S. and global expansion. This is supported by the International Monetary Fund''s World Economic Outlook, released in late September, which acknowledges that while factors like rising energy prices will slow growth in 2005, the overall expansion will continue unabated at a rather respectable rate of 4.3%.

Let''s take a look at the most recent economic indicators to highlight the key elements of our case.

The current picture

The Institute for Supply Management''s (ISM) figures, as always, offer a solid perspective on the state of the current U.S. manufacturing economy.

  • September''s PMI index registered 58.5%, indicating that the U.S. manufacturing economy continued growing for the month, albeit at a slightly slower pace than was observed in August. September''s growth nevertheless marks the 16th consecutive month of continued industrial expansion.The rule of thumb here is that any rate above 50% signals manufacturing growth, while rates above 42.8% record growth in the overall economy.

  • The ISM''s Production Index also grew in September, but at a faster pace, recording a 2.1% jump from August, and measuring 61.6%. This expansion represents the 17th month of continued production growth.

  • Tempering enthusiasm arising from the number for production, the pace of growth for new orders continued to diminish in September, recording 58.1%, a 3.1% decline from August. However, the mark still signaled the 17th consecutive month in which new orders climbed.

  • At 59.6%, the ISM Supplier Deliveries Index, which measures the delivery performance of manufacturers'' suppliers, again slowed in September, continuing its 33-month-long trend. This rating does however represent a 3.6% decrease from August''s level of 63.2. Growing delivery times tend to point towards diminished production capacities, which is a clear sign that suppliers will soon need to expand capital investment and begin rehiring workers; longer delivery times also encourage manufacturers to expand inventories.

  • Manufacturers'' imports showed a dip again in September, measuring 55.8%; however, any rating above 50% is still indicative of growing imports. Increased material imports have tended to coincide with growth in the overall manufacturing industry. As with imports, exports also slowed in September, recording only 51.8% growth. But again, despite slowing by 2.4%, the export figures for September still represent the 22nd consecutive month of expanding export orders. It should be noted, though, that the rubber and plastics products industry was not one of the eight industry groups reporting new export orders in September.

    Other key indicators

    The U.S. housing market is still booming despite some early signs that things might finally begin to cool off. August''s new residential housing starts, completions, and sales are all up from July and remain significantly above the corresponding figuures for 2003. However, the number of new home permits dropped 5.5% in August, and, more troubling, remains .06% behind the numbers for 2003.

    Keep in mind that month-to-month changes in housing performance ultimately mean very little for plastics processors. It is the long-term trend that counts, and producers of key housing supplies-appliances, wire and cable, lighting fixtures, furniture, flooring, and windows-all have healthy order books, and can anticipate both a very strong fall and beginning of 2005.

    In the major plastics consuming industries we see a similar picture to what is happening in the plastics industry: greater levels of production coinciding with an ever-widening negative trade balance. Looking, for example, at computers and electronic products we see that the number of new orders and shipments for domestic manufacturers rose 12.5% and 14.1% respectively from July 2003 through July 2004, while the U.S. trade deficit for Computers and Electronic Products, NAICS-334, grew by 30.6% during the same period.

    Price competitiveness is one of the key factors determining the success of U.S. products both in the domestic market and those overseas; consequently, following pricing trends can help us better gauge the likely success of many domestic industries. The export and import price indices tell us that while non-petroleum import prices have increased 3.2% from August 2003 to August 2004, similar non-agricultural export prices have slightly outpaced this rise, averaging 3.9% over the same period.

    Of more concern than this slightly unfavorable balance is the fact that specific import prices on many important plastics consuming products have fallen at a much more significant rate. So, for example, from August 2003 through August 2004, import prices for Computer Equipment and Office Machines (SITC-75) and Telecommuni- cations and Sound Recording and Reproducing Apparatus and Equipment, (SITC-76) fell by 7.7% and 5.3% respectively. Correspondingly, export prices for their domestically produced counterparts, fell by just 1.9%.

    This disadvantage is also apparent, although to a slightly less significant degree, when examining the manufacturing category of machinery and transportation equipment, which experienced a .7% decrease in import prices in contrast to a simultaneous .4% increase in export prices.

    Global plastics trade

    Looking specifically at the U.S. plastics industry, the U.S. Plastics Products (NAICS 3261) trade deficit continued its discouraging expansion, growing by 62%, or more than $1.25 billion, through July versus the same period in 2003. Even more alarming, a recent study commissioned by the Society of the Plastics Industry (SPI), has shown that the "true" plastics deficit is many times higher, when plastics contained in other imports are factored into the equation.

    However, at the moment this deficit is mitigated by simultaneous increases in both domestic plastics production and new orders; and, as with imports, U.S. domestic exports have risen continuously throughout the year, recording a 10.3% increase in U.S. domestic exports of Plastics Products NAICS-3261 over the same period in 2003 (including a more than 10.2% rise in plastics product exports to Mexico, and a 56.5% jump in exports to China).

    The expanding global markets, like those of the newly emerging Asian giants India and China, should help ensure that domestic plastics production and exports continue to rise.

    India''s economy, for example, is predicted to continue its impressive growth in 2005, growing at a rate of 6.7%, according to the most recent IMF projections; China''s market, while cooling a bit, is nonetheless expected to grow at the impressive rate of 7.5% in 2005.

    What is even more reassuring for those U.S. plastics processors competing with low-cost Chinese imports is that, as China''s economy continues to develop, the expectations within its labor market are also rising.

    This trend was discussed in a recent Washington Post article by Peter Goodman. The piece reports on how the Daojiong Hequn Plastics Processing factory in Southern China, "can no longer find enough young women willing to spend their hours bending over machinery slicing artificial hair for toy dolls bound for the United States." This shortage reflects the growing expectations of Chinese workers for better pay and improved working conditions, a demand that Chinese manufacturers will increasingly need to take seriously, especially considering that rural wages have jumped 15% to 40% over the last year.

    However the long-term picture will depend on U.S. producers increasingly improving both productivity and specialization. A growing U.S. economy can sustain trade deficits, but only if two things continue to happen:

  • Domestic manufacturing industries must continue to adapt their businesses so as to capitalize on their access to superior technologies and methods of production, continuously finding ways to increase the value added elements of their own products.

  • Second, U.S. manufacturers must also continually strive to find new foreign markets, a process that has become increasingly necessary and possible over the last two decades. Globalization''s offset is the access to new markets.

    Agostino von Hassell [email protected], and Mark Bella [email protected], of the Repton Group LLC (New York).

  • TAGS: Business
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