By Chris Kuehl, managing director, Armada Corporate Intelligence
It is an old saying, but it remains quite accurate: “Life is what happens when one is making other plans.” The economic issues facing the plastics industry always are complex, but they are not usually this unpredictable. This global volatility comes through when surveys are conducted. It can be seen in the Purchasing Managers’ Index and in much of the data that is coming from sources such as the Federal Reserve, the Labor Department and others.
As of this writing, the world is trying to determine how real the peace deal with Iran is and when there might be a return to some sense of normalcy in the oil markets. The basic problem is that many sectors are stuck in a “wait and see” position. The price per barrel of oil can jump from $70 to $120 in just a couple of days and then fall back again. Freight costs are headed back toward the bad old days of the pandemic – with container prices up by 62% in just one month. That has had a profound impact on construction and manufacturing alike. In spite of all this chaos and uncertainty, there still are some hints of good news.
Capacity Sees Small Improvement
Capacity is a measure of how efficiently a company is performing and serves as a shorthand way to judge whether there is solid business growth. Ideal capacity utilization falls between 80% and 85%, signaling there is little slack in the operation while also indicating few bottlenecks. Nationally, capacity utilization has been in the low 70s, which is a bit higher than it was a month ago. When utilization falls below 80%, there is relatively little purchasing of new equipment and reduced hiring. When it crests above 85%, shortages and operational stress begin to emerge, but that also triggers additional investment and more employment to
meet demand.
Another solid indicator for business is the new order activity. It is one thing to keep responding to existing customers, but gaining new orders is a sign of growth and expansion. The data shows new order activity increased by 42.66% in the last quarter, a faster pace than the previous quarter. Another 40.22% of respondents saw their new order activity remain stable, while only 17.12% saw activity decline. Given the ongoing stress from inflation and the recent upsets in the supply chain, these are very good numbers. New order activity is tracked in a variety of ways, from data collected in the Purchasing Managers’ Index to more industry-focused studies.
Labor Market Holds Strong
There has been some good news on the employment front as well. The labor situation for manufacturers and the construction industry been has complex for many years. By now, the industry probably has heard economists warning of the “mother of all recessions” by 2030. In fact, predicting that far into the future is next to impossible. What they really are warning of is a demographic meltdown as every Baby Boomer reaches retirement age – all 72 million of them. There already is a labor shortage, and it stands to get worse because there are few people with the needed skills.
In a recent survey of small- and medium-sized manufacturers, 33.06% of respondents reported they were hiring, while another 57.45% said employment levels remained stable. Only 9.49% reported employment numbers declined. The fact is that companies are worried about losing the skilled workers they already have and will tend to keep their payroll numbers up even when there is economic stress. That has been a key factor behind the stable employment data. Under different circumstances, companies likely would have reduced their staff in response to the economic challenges, but they fear they will not be able to hire the people they need when there is a rebound. There is a strong incentive to hold on to skilled workers, even when business slows.
Supply Chain Costs Rise
Now we come to more negative and stressful data: supply chain costs. This has been a major headache in recent months and stands to be an ongoing challenge through most of the rest of the year. When asked whether they were seeing higher prices for inputs such as steel and aluminum, 88.89% of respondents in a manufacturing survey reported sharply higher prices, while another 10.30% reported prices had stabilized (at a high level). Only 9.49% reported prices had come down, and it appears many of those companies had longer-term deals in place. The price of steel, aluminum, copper and other construction materials has continued to inhibit many projects. The supply chain crisis also has affected the raw materials used in plastics manufacturing. The plastics industry is closely tied to the petrochemical sector and has been just as affected by the volatility impacting the oil and gas industry.
Logistics Pressures Continue
The other area experiencing sharp price increases is logistics, and that comes as no surprise. Survey readings showed that 84.55% of respondents saw increased logistics costs. The oil shock has driven the transportation sector into a pricing panic. The flatbed truck market especially is vulnerable to high diesel prices, and many operators have simply parked their trucks until fuel costs stabilize.
Right now, there are 80 loads available for every flatbed truck, contributing to record transportation costs across every level – truck, rail, ocean and air. Only 15.18% of respondents reported stable logistics costs, while just 0.27% saw these costs come down. That likely is to remain the story for many months to come.
Tech Drives Investments
Another sliver of positive news can be found in the appetite for capital equipment. In light of the labor shortage, manufacturers continue to rely more and more on technology and machinery. One manufacturing survey reported that 51.63% of respondents still are on track to make capital equipment purchases this quarter, while 15.49% have delayed purchases by just one quarter. Another 11.96% will delay by two quarters, and 20.92% have decided to delay purchases indefinitely. The last number is up from previous quarters and signals that there is more uncertainty than had been the case earlier.
Looking more closely through the data on what kind of equipment companies are investing in, there are obvious trends. The equipment is set to replace what might have been done with labor, reflecting the continued shortage in the workforce. There also is keen interest in robotics and the expansion of artificial intelligence.
Closing Outlook
The most encouraging news comes as questions were asked about the business outlook. In a major business survey, 58.20% of respondents reported a positive assessment of future business, while 33.33% saw a stable business environment. Only 8.47% expected conditions to worsen, which is a smaller percentage than reported pessimism in the previous survey.
If there is an overall conclusion to be reached, it is that many companies remain upbeat about their future operations despite the pressures inflicted by inflation and the ongoing labor shortage. There is acknowledgement of the challenges ahead (especially within the supply chain), but growth still is expected. n
Chris Kuehl is managing director of Armada Corporate Intelligence. Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations.
More information: www.armada-intel.com