Time to start worrying? Not yet...

Recovery can be frustrating: Despite the fact that almost all the major economic indicators signal economic expansion, growth has been sluggish in many areas and the statistics on foreign trade have shown increasingly troubling imbalances.

So, as one economic report after another fails to meet the full expectations of the manufacturing community, and as the deficit continues to mount, more and more attention is being paid to the question of whether these sluggish and negative indicators are signs that the recovery is beginning to derail, or if they''re merely momentary bumps in the road to full recovery.

Here is a quick look at some of the most recent economic indicators, which highlight both positive and discouraging trends.

The current picture

The Institute for Supply Management''s (ISM) figures provide a good perspective on the current manufacturing economy in the United States.

August''s PMI index recorded 59%, indicating that U.S. manufacturing continued growing that month, but at a slower pace than was seen in July. August''s growth marks the 15th consecutive month of continued industrial expansion. As a rule of thumb, any rate above 50% signals manufacturing growth; rates above 42.8 record growth in the overall economy.

Note that many plastics processors-with the exception of blowmolders and producers of caps and closures (think soft drinks)-have traditionally seen slower growth in August and resumed expansion after Labor Day.

Like the general PMI index, ISM''s manufacturing Production index also grew, but at a slower pace than was seen in July, recording only 59.5, a 6.6-point drop from July''s rating of 66.1. Nevertheless, this performance represents the 16th month of continued production growth and remains well above the 49.9% watermark, generally indicative of growth.

Not surprisingly, the pace of growth for new orders also slowed in August, recording growth at 61.2%, a 3.5-point drop from July. However, this growth still signaled the 16th consecutive month in which new orders climbed. When evaluating new orders, continuous ratings above 51% are generally indicative of growth in new manufacturing orders.

At 63.2%, the ISM Supplier Deliveries index, which measures the delivery performance of manufacturers'' suppliers, again slowed in August, continuing a 32-month trend. This rating does, however, represent a 1% decrease from July''s level of 64.2. Growing delivery times tend to point toward diminished production capacities, 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.

The ISM index for backlog orders recorded 55% in August, suggesting that manufacturers'' backlogs grew at a slower pace than in July. Manufacturers'' imports showed a slight dip in August, measuring 59.2%; any rating above 50.5 is 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 August, checking in at 54.2%. However, despite slowing by 2 points, the export figures for August still represent the 21st consecutive month of expanding export orders. The Rubber and Plastics Products industry was not one of the eight industry groups reporting new export orders in August, though.

Other key indicators

The U.S. housing market is still booming despite some early signs that things are finally beginning to cool. July''s new residential housing, permits, starts, and completions are up from June and remain significantly above the numbers for 2003. However, new home sales dropped 6.4% in July, and remain 1.9% behind sales in 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, light fixtures, furniture, flooring and windows-all have healthy order books and can anticipate a very strong fall.

In the major plastics-consuming industries we see a similar picture to that in the plastics processing industry: greater levels of production coinciding with an ever-widening negative trade balance. Looking at specifics, in computers and related products we see that the number of new orders for domestic manufacturers rose 14.4% from June 2003 through June 2004, while the U.S. trade deficit for Computers and Electronic Products, NAICS-334, grew by 31.3% during the same period.

Price competitiveness is one of the key factors that determines the success of U.S. products in both domestic and overseas markets; therefore, following pricing trends can help us better gauge the likely success of many domestic industries. A quick look at the export and import price indices tells us that while non-petroleum import prices have increased 2.6% from July 2003 to July 2004, similar nonagricultural export prices have slightly outpaced this rise, averaging 3.5% over the same period.

More troubling 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 July 2003 through July 2004, import prices for Computer Equipment and Office Machines SITC-75 and Telecommunications & Sound Recording & Reproducing Apparatus & Equipment, SITC-76, fell by 7.1% and 4.7% respectively; export prices for their domestically produced counterparts actually rose in the case of former, and fell by a much less significant factor in the case of the latter.

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 67.3% or $403 million in the first half of 2004 when compared to the same period in 2003. Even more alarming, a recent study commissioned by the Society of the Plastics Industry (SPI) shows that the "true" plastics deficit is many times higher when plastics "contained" in other imports are factored into the calculation.

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 rose consecutively throughout the second quarter of 2004; recording a 10% increase in U.S. domestic exports of Plastics Products NAICS-3261 over the same period in 2003 (including a greater than 10.5% increase in plastics exports to Mexico, a 54.3% jump in exports to China, and 67.4% rise in plastics exports to Taiwan).

Rising plastics exports and increased output by domestic plastics-consuming industries will help spur growth for many U.S. plastics manufacturers; however, the long-term picture will depend on maintaining a healthy balance between plastics imports, exports, and domestic demand.

While a growing U.S. economy can sustain trade deficits, domestic manufacturing industries cannot long suffer significant imbalances that are disproportional to this growth; in this type of environment U.S. manufacturers will increasingly need to explore foreign markets.

No two recoveries are likely to be identical; each period of growth or contraction will unfold within a unique domestic and global setting.

For example, this time around the pace and scope of China''s industrial expansion have influenced some of the characteristics of this recovery, as have the events of 9/11, the subsequent war on terrorism, and the conflict in Iraq. While many of these differences have acted as a drag on the current recovery, we do not feel that their impact will ultimately be sufficient to derail the current period of growth and expansion in the U.S.

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

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