Your Business Outlook - April 2006

According to our Injection Molding Business Index, total output by domestic injection molders held close to steady in 2005. However, at year’s end, some molders were running flat out while others were struggling with materials shortages and the huge problems at the Big Three auto makers. Growth rates will remain a bit erratic in some sectors, but our forecast calls for a solid increase of 4% to 5% for injection molded products in 2006.

Overall U.S. manufacturing also was expanding at a 5% annual pace in early 2006. U.S. manufacturers are benefiting from strong domestic and export demand, and business investment is expanding at close to a double-digit pace. Sturdy global growth and a somewhat weaker dollar are fueling exports.

Makers of high-tech electronics, robots, ma chine tools, aircraft, and agricultural and construction equipment are enjoying the strongest growth. Only the domestic auto makers and manufacturers that compete with Chinese textiles, apparel, chemicals, and furniture are struggling.

Injection molders’ operating capacity has been much slower to expand than output, and utilization rates thus have risen sharply. Yet, processors are struggling with high costs for resins, energy, and labor, so they are not adding workers as fast as output is growing.

With the notable exception of automotive, many large durable-goods sectors that are major users of injection molded parts are predicted to grow in 2006. Strongest amongst these will be computers, consumer electronics, medical devices, and appliances. Consumer spending on durable goods expanded at a solid rate of 4.5% in 2005, and would have done even better if not for the 4% drop in spending for motor vehicles. Growth in durable goods for 2006 will again be 4% to 5%. Motor vehicle production will be flat compared with 2005, and there will be a shift away from light trucks (including SUVs and minivans) toward passenger cars.

In the non-durable category, the main market for plastics is packaging, primarily for food, and here the news is quite encouraging. Retail sales in food stores are a strong indicator of demand for plastics packaging, and in 2005 that indicator expanded by a higher-than-average 4.6%. This increase was largely attributable to increased consumption of high-value food products.

 

Quality over quantity

This trend in packaging is indicative of another trend in plastics markets that promises to continue well into the future: a shift in market demand away from quantity and toward quality. Since 2002, output of plastics products has increased at an average annual rate of 3.2%. This is only moderate growth by historical standards, which is not surprising in view of the manufacturing that has been lost to low-cost suppliers abroad.

More surprising is what happened to the value of plastics products shipped rather than their volume. The value of plastics product shipments since 2002 has grown at an average annual rate of 7.5%, more than twice the growth rate of total output. Anecdotal evidence strongly suggests that the bulk of the production that moved overseas was for commodity-grade products with low value-added. The products still manufactured domestically are higher in value.

Thus, in spite of sharply higher resin prices and surging competition from low-cost imports, the U.S. plastics industry continues to expand. Production volume lost to overseas competitors has been re-placed by higher value-added domestic products.

There is downside risk to this forecast due to geopolitical instability, the potential for severe weather, and the effects these two factors have on energy prices. At present it is most probable that prices of crude oil and natural gas will gradually decline in 2006. But there is no guarantee.

Another risk to this forecast is the anticipated slowdown in the housing market. There is a strong consensus amongst economists that the housing market will cool in 2006 and ’07, but the question is how much. For now, it seems most likely that the effect will be moderate. But a steep descent would likely be enough to push the overall economy into a recession.