It has now been four years since the U.S. economy emerged from the Great Recession, and the best way to describe the current economic situation is that we are holding steady. For the past four years the rate of growth in the U.S. GDP has been right around 2% per year. This is the longest period of sub-3% annual growth since the Great Depression started in 1929. But I do not expect a recession anytime soon. In fact, I expect growth to accelerate.

Our latest forecast for GDP in 2013 calls for a growth rate just a tad higher than 2%. This will result in about 2 million new jobs being created. In other words, things this year will be the same as the year before and the year before that. In 2014, GDP growth will elevate to over 3%.

Despite the recent sluggishness, the resilience of the U.S. economy over the past few years is reason for optimism. The growth rate has been sub-par, but there have been many restraints and hurdles to overcome. A weaker economy would likely already be in a recession. The predominant obstacles this year are the increase in payroll taxes, the decrease in government spending, and weak export demand from our major trading partners in Europe. Fortunately, the negative effects of all three of these issues will moderate as we go forward. The second and third quarters of this year will be the weakest in terms of overall economic growth. The growth rate will gradually increase in the fourth quarter and beyond.

But though we expect the economy to gain momentum in 2014, it does not mean there will be no obstacles or headwinds to overcome next year. Healthcare reform is looming out on the horizon. This will result in a large period of adjustment in the labor market. The labor market is already struggling with the problem of the skills gap, and this problem is not going to be resolved any time soon. These issues will ultimately put a ceiling on just how fast the economy will be able to grow in the long run. There is also the issue of how the Federal Reserve Board is going to unwind its unprecedented and massive program known as Quantitative Easing, but I will save that discussion for a later time.

All of these issues notwithstanding, our outlook calls for steady improvement in the U.S. economy and the U.S. manufacturing sector through the middle of this decade. The first test will be this summer when the full effects of the sequester start kicking in. This will also be about the time that Congress has to raise the debt ceiling again. Other threats include: the possibility that the economy in the European Union could collapse; and tensions with Iran could escalate as a result of their nuclear program. But assuming we can get past these tests, the U.S. economy is poised for a period of more rapid recovery through the middle of this decade.
 

For the third time in the past four months, the total monthly output of U.S. manufacturers declined. According to data released by the Federal Reserve Board this morning, total U.S. industrial production fell by 0.5% in April. The output for the manufacturing sector slipped 0.4%. This was the result of a drop of 0.6% in durable goods production and a decline of 0.1% in the production of nondurable goods. The bellwether motor vehicle segment declined 1.3%. So output from U.S. factories remains on a trend of gradual weakening. The manufacturing sector had been a source of growth in the overall U.S. GDP data in recent quarters, but it looks like it will be a drag on growth in the second quarter of this year.

The sluggishness in the manufacturing sector is not a total surprise. Foreign demand for U.S. exports remains soft, and most manufacturers have reduced inventory levels in anticipation of stalled consumer demand this summer. The good news is that export demand is not expected to fall much further and consumer spending will gradually increase as the year progresses. Thus, factory output will slowly ramp up in the second half of this year. A more rapid acceleration is in the forecast for 2014.

The two best indicators of future manufacturing activity in the U.S. continue to be the trends in the employment data and the residential construction data. The trend in U.S. housing starts is in a well-established recovery, and this will spur economic growth in all sectors of the economy. Economic analysis indicates that for every one dollar spent in the construction sector a total of six dollars of economic activity is generated. This will drive the employment figures higher, which in turn will result in a rise in household incomes and consumer spending. And that is the recipe for stronger factory output and increasing demand for new molds and tooling.

 

A couple of weeks ago, I reported that the monthly data measuring the total industrial production of plastics product in the U.S. was revised downward for 2012 and 2013. This data is compiled and reported each month by the Federal Reserve Board. As part of this effort, the Fed also compiles and reports monthly data on the capacity utilization rate of the plastics industry. Unfortunately, this data was also revised downward significantly.

Before the revisions, the reported rate of capacity utilization in the plastics industry through the first quarter of 2013 was averaging very close to 80% and rising. It had not been above the 80% threshold since before the last recession, but it appeared as if it most certainly would get there very soon. History shows that there is a surge in capital spending for more molds, tooling, and machinery when the rate of capacity utilization in the plastics industry gets above the 85%-level and stays there for a few months. I did not think we would get to this halcyon level this year, but it certainly looked possible for next year.

Now the revised data indicate that the capacity utilization rate in 2013 is averaging less than 74%--that’s right, less than 74%. The revision subtracted nearly six percentage points from the data that was previously reported. And to make matters worse, the trajectory in the data over the past year (the trend) is flatter than it was before. So not only are we much farther away from the 85% range, we are progressing upward at a slower rate. At the current pace of improvement, the data will not get anywhere near 85% for several more years.

On a positive note, I expect the trend in the utilization rate to accelerate as the recovery in the overall U.S. economy and manufacturing sector picks up momentum later this year and through 2014. And the growth in demand for new molds and tooling will also accelerate shortly thereafter. It is too early to tell when or even if this indicator will ever get back up to the 85% level. I will continue to watch it closely and report on its progress.  But for now, the data are stuck in a slow-growth mode, and though I may not be happy about the revisions and what they imply, I cannot argue with them either.

 

The Committee for Equipment Statistics of the Society of the Plastics Industry has started to compile and report data on the market for hot runners. This is a new data set, so the amount of statistical analysis that can be performed is limited. But the trend in market demand for hot runners should ultimately prove quite interesting to moldmakers. More data is always better than less. With that in mind, here is my analysis and forecast of the hot runner data.  

In the fourth quarter of 2012, the data for hot runner demand suffered a disconcerting drop of 23% from the total booked in the third quarter of this year, and it was down 15% when compared with the total from the fourth quarter of 2011. For 2012 as a whole, hot runner bookings gained 2% when compared with the total from 2011.

Despite the precipitous drop in the number of units ordered, the total dollar value for new bookings in Q4 of 2012 escalated by 7% when compared with Q3 of this year. The Q4 dollars total represented a gain of 14% when compared with the same period of last year. For the annual total in 2012, the value of hot runner bookings was up by a solid 22% when compared with the annual total from 2011.

The end-market breakdown for Q4 shows that most categories were down in terms of units from year-ago levels. Automotive declined by 11%, packaging dropped by 16%, and medical was off by 20% when compared with Q4 of 2011.

The forecast for this market calls for continued growth in hot runner demand in 2013 when compared with 2012, but the strongest gains will occur during the second half of this year. The first half of 2013 is expected to be steady-to-down. The growth rate will decelerate because the historical comparisons will be more difficult this year. In 2013, look for a gain of 5%-6% in the number of units ordered, and an increase of 8% in the dollars total.

Photo courtesy of DME.

By now the pattern has become all too familiar. In each of the past three years the economic data from the first quarter has shown some promise that a stronger pace of growth was imminent. The stock market escalated and the employment data firmed. A self-sustaining recovery looked possible. But by summertime the pace of growth turned sluggish. And labor market cooled, the stock market fizzled, and the pace of expansion remained sub-par.

And there was always a good reason for the sluggishness that ultimately prevailed: the tsunami in Japan; surging energy prices; and the ineptitude of policymakers in Washington. Analysts are now referring to this as the "spring swoon." And some are suggesting that we will likely have another swoon in 2013.
To be sure, we already have an excuse for subpar growth this year. The latest bout of fiscal austerity within the federal government caused by the sequestration will trim about 1.5 percentage points off of GDP growth in 2013. The most noticeable effects of these cuts in federal budget will be felt in the second and third quarter of this year. So I suppose there is good reason for investors in the stock market and companies that are considering adding new workers to be cautious.

But I think this year will be different. Budget cuts in Washington will impede overall economic growth, but growth in the private sector will continue to improve. And for the first time in the past four years the recovery is proceeding in a traditional manner. We are finally getting an old-fashioned recovery in the business cycle because this time around it is being led by growth in the data on housing starts.

Increasing housing starts, a rising stock market, and low interest rates used to signal the end of a recession and the beginning of the next expansion phase of the business cycle. Interest rates have been at historically low levels for several years now, and the stock market has completely rebounded. But until just recently, the housing starts data languished. The result was sluggish economic growth. But now that the recovery in the housing and real estate sectors is in full swing, more robust economic growth is only a quarter or two away.