Data points to positive outlook for toolmakers

Demand for new molds and tooling is sensitive to a wide array of trends in the U.S. economy. These include changes in personal spending, tax rates, interest rates and exchange rates. But most importantly, growth in orders for new molds is highly susceptible to major trends in the data on U.S. manufacturing. History teaches us that when the U.S. manufacturing sector contracts by even a modest amount, demand for new molds and tooling can drop dramatically.

A manufacturing sector that is consistently generating good news is crucial to the outlook for mold makers. Therefore, I am gratified to report that the manufacturing sector ended the third quarter with some positive momentum, and the outlook for the coming months continues to improve.

The ISM Manufacturing Index for September came in at 60.8 (a value over 50 indicates expansion). This was a salubrious gain of 2 points when compared with the 58.8 reading for August, and it is the highest overall reading since 2004. As you would expect when the headline number surges past the 60 level, the underlying details are also quite encouraging. The new orders component jumped to 64.6. The employment measure escalated to 60.3 — the best reading since 2011. And the subindex for prices paid registered a robust 71.5 — also the highest since 2011.

To be fair, it must be noted that some of the increase in this index was likely due to the effects of two major hurricanes. Harvey shut down many refineries and chemical plants, and this probably accounted for a portion of the jump in prices paid. Both Harvey and Irma destroyed a lot of capital equipment and merchandise, including cars, so this also had a positive effect on the monthly figures.

But if you look closely at the data, you will see that the manufacturing sector was starting to gather steam before the storms hit. This is primarily due to three trends that started earlier this year: improving global demand, increasing capital spending in the United State; and a weakening U.S. dollar.

These trends have also provided solid support to demand for U.S. mold and tooling. This is not to say that the mold making industry is going gangbusters at the present time or that it is in danger of blasting off into the stratosphere in the next year or two. But after analyzing the data from the third quarter, I believe overall business conditions for mold makers in the coming year will be mostly steady. As always, some shops will be busier than others and it will remain necessary to monitor closely any changes in the direction of indicators such as the ISM Manufacturing Index.

That's because, for an industry as sensitive as mold making, there is always downside risk. Demand for many types of injection molded products is expected to benefit next year from a gradual improvement in aggregate demand, both globally and here in the United States, but there are some areas of concern.

One of these is the recent trend in demand for motor vehicles. After two record-setting years in 2015 and 2016, demand for new motor vehicles has registered a modest decline in 2017. According to the latest figures from AutoData Corp., total U.S. light vehicle sales are down just about 2 percent through the first three quarters of this year. The data shows a gain of over 4 percent in sales of light trucks, but a drop of more than 10 percent in sales of passenger cars. Not surprisingly, there was a surge of demand in recent weeks from the south-central region of the country as vehicles destroyed by Hurricane Harvey are starting to be replaced.

September marked the first time this year that the monthly sales data posted a year-over-year increase. This spike came at a fortuitous time because vehicle inventories had swelled to their highest levels in 13 years and some analysts were estimating that there were as many as 500,000 more vehicles in stock than were needed to meet expected demand. No doubt those statistics were starting to raise anxiety levels for a good many mold makers.

The aftereffects of Harvey and Irma will likely supply a significant boost to the sales data for another month or two, but this burst will probably not last past the end of this year. As we start 2018, demand for motor vehicles should revert back to the trend that prevailed before the storms hit.

This means that the U.S. demand for new motor vehicles will continue to decline gradually off the peak from 2016, but this decrease will be less severe than past cyclical downturns because of slow but steady improvement in the employment and income data. A lot of the pent-up demand that was the result of the recession in 2009 has been sated, but not all of it. Demand for light trucks will continue to outpace passenger car demand, especially in the South as construction workers and contractors ramp up their activity levels.

I do not expect the next cyclical upturn in sales of motor vehicles to start for another couple of years. Until then, automakers will still need new tooling, but the marketplace will remain competitive. The next major cyclical upturn in demand for both new motor vehicles and new tooling may be the result of a market shift to electric vehicles.

One more risk to this outlook I will mention is the ever-present potential for an unforeseen change in either interest rates or exchange rates. When compared with the currencies of our major trading partners, the value of the dollar has been trending downward for most of this year. There is a good chance that interest rates in the U.S. will continue to rise slowly, and this will support the value of the dollar.

My latest forecast calls for only incremental changes in the value of the dollar in the coming year. The slow rise in U.S. interest rates will coincide with improving global economic conditions, and this will keep the volatility in the currency markets subdued. In other words, I am predicting a continuation of the current situation. I will let you know if and when this sentiment changes.