The market for medical equipment and supplies was gaining momentum at the end of last year, and there are strong expectations for this trend to continue in 2016. This is according to our latest quarterly Business Monitor Index survey of processors, compounders and tooling suppliers that supply the medical industry.
The PN Business Monitor medical index for the fourth quarter of 2015 escalated to 119.1. A value above 100 indicates that business activity levels increased when compared with the previous quarter. The fourth quarter medical index represents a salubrious 16.3-point gain from the previous quarter, and it is also the highest value tallied in this sector for all of 2015. This value also indicates that the medical sector is the strongest of all the major end-markets for plastics products that we covered in our latest survey.
As the table indicates, there were solid gains registered in the fourth quarter in all of the business activities we measure, except for backlogs. And some of these sub-indices merit further commentary.
For instance, after trending flat-to-down for most of last year, there was a noticeable increase in export orders in the fourth quarter. It is well known that the value of the dollar has been in an upward trend in recent quarters, and this has made U.S. exports more expensive. The good news for plastics manufacturers is that there has been a concurrent decline in the price of resins, which has been passed through to their customers, and this has resulted in a decline in the prices received. This quarterly data might just indicate that the decline in the price of plastics products has mitigated the rise in the value of the dollar, and export demand will now increase.
Our “prices received” sub-index shows that prices for plastics products fell during the first three quarters of last year before stabilizing in the fourth quarter. But despite falling prices for their products for most of last year, more than half (55 percent) of the processors who supply the medical sector expect to be more profitable in 2016, while only 9 percent expect to be less profitable. This is a significant improvement from their expectations in the previous quarter, and it is strong evidence that the lower prices they are receiving for their products are spurring demand growth yet allowing them to maintain or improve margins.
Another trend worth calling out is the sharp increase in the “employees” component. Payrolls for processors were rising all of last year, but the trend accelerated in the fourth quarter. When this trend is compared and combined with the plans to increase capital spending, it becomes clear that future expectations for the coming year are running high, and that these manufacturers are investing their money accordingly.
Medical equipment growth rate
For another perspective on the medical products end-market, I have included a chart that measures the growth rate for U.S. production of medical equipment and supplies. There are two things to keep in mind while perusing this chart. First, this data includes all medical equipment and supplies produced in this country, not just the products made from plastic. That makes it a real good market indicator when used in tandem with our plastics-specific data. Second, this is a chart of the changes in the growth rate in this industry based on the changes in the volume. It is not a chart of the actual levels produced, and it is not based on any dollar value.
This U.S. medical equipment and supplies industry has grown steadily for many years, and a graph of the actual volume of goods produced would almost always aim upward. But the rate of growth has a distinct cyclical pattern. In other words, it is easy to predict that this industry will expand based on its recent history, but the rate of expansion varies. And the expected rate of growth is important to processors in the supply chain that want to manage their businesses for optimal profit.
Output levels in this industry increased by 5 percent in 2014, but the pace of growth decelerated to just over 2 percent in 2015. Some of this deceleration was likely due to sluggish gains in export demand. Another factor that is affecting the rate of growth is the shift in the cyclical pattern that resulted from the implementation of the Affordable Care Act (“Obamacare”). There were a lot of new consumers for these products brought on line with the new ACA, but that surge had worked its way through the data by 2015. So the combination of sluggish gains for exports and consumer demand resulted in more moderate industry growth last year.
I expect the growth rates to hit bottom in the first half of 2016, and they will then start to accelerate gradually during the second half of this year. Overall demand levels will be strong throughout this year, but the gains in market demand will become more of a challenge for some plastics processors as the year progresses. Our data clearly indicates that many processors are anticipating this scenario. In order to meet this demand, they have hired new employees and they are planning to purchase more equipment.
