After a somewhat lukewarm 2003, a year in which the GDP of USA grew modestly by about 3%, in the first 6 months of this year, the US economy has recorded a healthy growth of almost 4%. The Federal Reserve Board has published the industrial production index for plastics products of average 109.5 in Q2-2004, an advance of 3 percentage points as compared to the previous year. This is indeed a positive indication for the plastics industry as during the previous 8 quarters, plastics product output had managed an average growth of less than 1% only. This acceleration in plastics processing activity followed the trend in total U.S. industrial production, which saw an expansion of nearly 6% in the second quarter. Plastics output will continue to rise as this year progresses, and the annual total for 2004 will be up 5%- 6% as compared to 2003.

The capacity utilization rate for plastics processors has also seen an upward acceleration. The processing sector, with capacity utilization that hovered around 79% a year ago, seems to have achieved capacity utilization of about 83% in the first 6 months of 2004. 85% capacity utilization level has historically been the range that triggers increased spending on new equipment, and at its current trajectory, the levels are estimated to hit 85% later this year. These forecasts, however, are based on expectations of continued improvement in the overall U.S. and global economies during the next couple of quarters.

To what extent have growth levels been negatively affected due to rising oil prices? The rising costs of energy products do not seemed to have caused any major upheaval so far. The present outlook calls for the growth trend to continue in the second half of the year, with GDP registering a gain of 4.5% for the year. This pace of growth is very close to the maximum "sustainable rate" of expansion in the economy. An important precursor to a continued recovery in the manufacturing sector is expanding corporate profits, and here the news has been quite favorable in the recent quarters. Total corporate profits were up 32% in the first quarter of 2004 as compared to the year before. This follows a very solid 18% rise in profits for all of 2003.

Other important economic indicators like housing, construction, packaging, automotive, also portend continued improvement in the U.S. economy and the plastics sector during the second half of 2004 and beyond. The trend in U.S. housing start ups is a reliable leading indicator of both overall economic activity as well as demand for plastics products. After a robust increase of 8% in housing starts in 2003, growth in this sector is up by a whopping 15% this year. This pace of growth will definitely decelerate in the second half of the year, but the number of new houses started in 2004 will still be quite high by historical standards. This will generate continued demand for plastics products well into next year.
Another indicator of demand for plastics goods, especially packaging products, is the trend in total retail sales. After a rise of 5% in 2003, retail sales (minus autos) are up a vigorous 9%, so far in 2004. The data will sustain this momentum for the remainder of the year. Retail sales are expected to advance nearly 7% in 2004.
The auto sector also mustered growth, as total sales at auto dealers are up 6% and US auto assemblies have swelled 1% so far this year. Both of these indicators will register growth in the second half of this year as well.

The Purchasing Manager's Index averaged a very solid 62.3% in the first half. A reading above 50% indicates an expansion in the manufacturing sector. According to the data that comprises this index, new orders and production levels increased substantially while inventory levels declined. Both of these conditions indicate that further growth in factory output is likely in the coming months.

The prices paid for materials such as petroleum, steel, and of course, plastics resins have been the most important negative factors for the plastics industry so far in 2004. The costs of petroleum products have climbed steadily since the first quarter of 2002. And this has pushed up resins prices quite dramatically during this time period.

The currency markets remained relatively favorable to domestic manufacturers in the first half of 2004. The 2 year downtrend in the value of the dollar, that began in the first quarter of 2002, hit rock bottom in the first quarter of 2004 and then began to gradually reverse. Still, the U.S. Dollar Index was 12%-13% lower on an average, during the first half of 2004, than it was during the same period a year ago. A gradual rise in the dollar is expected to prevail for the foreseeable future, but the average value in 2004 will still come in 5%-8% lower than it was in 2003. This index is a trade-weighted average of the value of the dollar compared to the currencies of the major U.S. trading partners.