Capacity Utilization Rates for Plastics Processors Rising

Every month, the Federal Reserve Board compiles and reports data that measures the activity levels of U.S. plastics processors. One of the data series is the industrial production index for plastics products. This is an indicator (expressed in index form where the base year of 2007=100) of the volume of plastics products produced each month in the U.S.. Another data series is the capacity utilization rate for U.S. plastics and rubber processors. This data is expressed as a percentage of the total sustainable capacity for this industry. We capture, analyze, and forecast the trends in both of these data series.

These data series are crucial for mold makers because they indicate future demand for new molds and tooling. The theory here is simple: if they are making more stuff out of plastic, then pretty soon they are going to need more molds. These two series are good indicators of how fast the industry is growing (or contracting), and when new capacity needs to be added in order to keep up with rising demand.

Our research indicates that the growth in total output of plastics products must be sustained at a rate of at least 3% over a long period of time in order to drive demand for new capacity. That is because new technology has made the industry more productive, and the productivity gains have averaged about 3% per year. In other words, advances in technology allow the industry to produce at least 3% more per year without needing to add new plants or equipment.

When the growth rate exceeds 3% per year for a sustained period of time, a need for additional plants or equipment is created. In 2012, total output of plastics products in the U.S. expanded by 4.5% and the forecast for this year calls for a gain of another 6%. What is really interesting, is the fact that the capacity utilization rate for the industry has changed very little during this time period. Over the past 2 1/2 years, capacity utilization rate for plastics processors has drifted upward from 73% to 74.6% in the latest month.

So we have enjoyed two years of robust growth in total output, but very little change in the rate of capacity utilization. This situation is not sustainable over the long term. Manufacturers have been reluctant to expand their production capabilities, and this is creating some pent-up demand. We expect that very soon the capacity utilization rate will start to rise in order to keep up with expanding demand for plastics products. As the utilization rate rises it will spur demand for new molds and new equipment.

It will likely not be obvious beforehand just what will trigger the release of this pent-up demand, but when it happens it could happen quickly. We will continue to monitor the data for both output levels and capacity utilization rates, and we will also continue to report our findings on this blog. But moldmakers should be forewarned – the recovery may soon be upon us.