E-Weekly
Apr 13th, 2007                                Print this article

Slowdown seen for U.S. plastics, manufacturing in 2007

By Tony Deligio

Memphis, TN — Citing a “lagged impact” of high oil and gas prices, rising interest rates, an income slowdown, and a tepid housing market, among other indicators, Bob Shrouds, corporate economist for global conglomerate and Dow Jones industrial average member company, DuPont (Wilmington, DE), forecasts a slowdown in 2007 for the economy at large, with manufacturing expected to grow at a little over 3%—its lowest rate since 2003. Addressing attendees at the Society of the Plastics Industry’s (SPI; Washington DC) Alliance of Plastics Processors conference and part-design competition (April 1-3; Peabody Hotel; Memphis, TN), Shrouds said the economy had been able to buck the traditional direct correlation between high energy prices and a broader slowdown, but following a 36% rise in oil prices in 2005, and an 18% increase last year, businesses and consumers are now feeling the impact.

In addition, Shrouds said there were 100 interest rate increases at central banks around the globe in 2006, including China, with that figure representing the most increases since the 2000 recession. The end result is a global real GDP (gross domestic product accounting for inflation) forecast of 2.9%. Consumer spending had propped up the U.S. economy, but Shrouds said decreases in home values have all but eliminated mortgage equity withdrawals (MEW), which a couple of years ago resulted in the injection of $2.5 trillion into the U.S. economy, as homeowners refinanced mortgages and cashed out the increased value. Finally, Shrouds said at a macrolevel the yield curve has turned negative, meaning that short-term interest rates are now higher than long-term ones. Shrouds said such an inversion is historically a 100% accurate indicator of a slowdown, and a 70% accurate indicator of a pending recession.

Shrouds did see reasons for hope, including the fact that corporate profits continue to grow, stock prices are rising on the whole, the U.S. Federal Reserve appears to be done raising rates, and the yield curve is only slightly inverted, but he admitted that while the pending slowdown might go unnoticed in some quarters, in others it will feel like an outright recession.

In manufacturing in general, and plastics specifically, Shrouds sees industry lagging behind the economy at large, dipping from 4.7% in real terms in 2006, to 1.5% in 2007, after climbing from 3.9% in 2005. For China, manufacturing is growing at 16%-17% annually. After growing at a strong rate of 5% in 2006, the U.S. production of plastic products fell to 1% in 2006, but is expected to rebound somewhat in 2007 to 2.3%.

Much of the slowdown in plastics will be linked to housing and automotive, with housing starts down from 2.3 million in January 2006 to 1.4 million in January 2007. “We think we’re at the bottom of the housing slowdown,” Shrouds said, “we just don’t think it will recover much.”

In automotive, Shrouds said total motor vehicle sales are down 3%-4%, describing the market as “soft, but not a recession,” pointing out that in the 2000 recession, auto sales fell 20%. Still, domestic manufacturers are “fighting for their lives,” according to Shrouds, who said from a pre-recession peak, sales for the “Big 3” are off 25% in units, while the other auto manufacturers active in the U.S. are up 28% in units since 2000, as GM, Ford, and Chrysler losing 2 percentage points annually in market share.

Finally, the continued run up in energy prices, and the subsequent effect on downstream chemical and plastics prices, will exert negative forces as well. Since the last recession, chemicals are up 80% in prices, driven by oil that went from $31/bbl in 2003 to $63/bbl in 2007, and natural gas that’s risen from $5.49/mm Btu in 2003 to $7.60/mm Btu in 2007.—tdeligio@modplas.com

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