U.S. packaging machinery shipments rise

Following an anemic (0.06 percent) increase in 2002, U.S. shipments of packaging machinery (excluding parts and service) edged up by $82 million or 1.7 percent in 2003 to an estimated $4.889 billion. The estimate is based on data derived from the Tenth Annual PMMI Shipments and Outlook Study from the Packaging Machinery Manufacturers Institute (www.pmmi.org).

Shipments are defined to include calendar-year billings of new machinery only, not used and rebuilt machinery or service and replacement parts. Tracing the history of U.S. packaging machinery shipments from 1995 through 2003 reveals that the industry is now beginning to follow through— albeit slowly—in recovery from the sharp downturn that occurred in 2001. It also shows that the industry has come off a period of heady times back in the mid- to late-1990s when annual growth of shipments was expressed in more solid numbers, e.g., 10.9 percent in 1995, 8.1 percent in 1997.

Likewise, the industry's performance over the past nine years has been attuned to a nearly predictable short-cycle pattern, with growth rates alternating sharply in amplitude from one year to the next. The pattern has been attributable to a number of diverse factors, some cyclical and others coincidental. In fact, the 2003 growth was based entirely on a surge in U.S. machinery exports, inasmuch as the industry's shipments to domestic customers declined for the year.

Read which MARKET DRIVERS are fueling the modest growth in machinery shipments at www.packagingdigest.com/info/shipments.

During recent years, domestic shipments growth had been the bulwark of the industry's annual gains, while exports languished. Therefore, the shift, if not temporary, may give cause for concern. While it is too early to conclude, as some analysts suggest, that future growth will be considerably more subdued than in the last decade, the reality is that many things have changed since then, and as a result, the heady numbers may not be as readily attainable as before.

On the other hand, an average annual growth of 3 percent to 5 percent going forward is not an unreasonable expectation. The heavy buildup in capital spending for machinery during the late 1990s, which was motivated by a combination of solid economic growth and end-users' quest for further productivity improvement, left the market abnormally saturated upon entering the new decade and thus vulnerable to the debilitating events and developments of 2001 and 2002. But with the economic recovery appearing genuine, the market seems to be regrouping for a new phase in packaging machinery shipments growth.

Marking a complete turnaround from the 2002 results, in which domestic market shipments edged up fractionally and exports continued to slide, the industry's 2003 shipments of packaging machinery to the U.S. domestic market declined while exports surged. According to the findings, U.S. domestic market shipments fell by -3.8 percent in 2003 to an estimated $3.937 billion, while conversely, exports shot up by $237 million or 33.1 percent to $952 million. The surge in exports was significant. Exports as a percent of total U.S. shipments had steadily fallen over all of the prior seven years from 22.4 percent of the total in 1996, down to 14.9 percent in 2002. Therefore, the 2003 upswing, which brought exports' share to 19.5 percent, appears to have defined a positive turning point.

The long-running negative trend had been attributed in part to the combination of a strengthening U.S. dollar and restrained foreign demand for machinery due to weakening global economic conditions. But the subsequent decline of the dollar in relation to foreign currencies, particularly the Euro beginning in the second half of 2002, provided a major benefit to U.S. machinery manufacturers' exports, as reflected in the 33.1-percent increase in 2003.

As a likely portent of good growth ahead for 2004, U.S. manufacturers of packaging machinery built up a large order backlog by the end of 2003. The value of orders booked but not yet shipped as of Dec. 31, '03 stood at $1.313 billion, which was up 23.6 percent from the amount recorded at the end of 2002, and represented the equivalent of nearly 27 percent of the year's total shipment value. The increase reflected the positive influences of economic optimism, end-users' scrambling efforts to commit the remainder of their 2003 capital budgets and PACK EXPO's late-year effect on producing order decisions. However, it also revealed that amid their continuing uncertainties about the economic outlook, as well as concerns about the geopolitical situation, some customers were asking for a delay in taking delivery of machinery they ordered.

U.S. domestic demand—the total of U.S. manufacturers' domestic shipments imports—amounted to an estimated $5.102 billion in 2003, down 0.2 percent from the value in 2002. One should note that inasmuch as U.S. manufacturers' shipments to the domestic market were off by 3.8 percent for the year, it was packaging machinery imports that easily filled the void. In fact, despite the weakened U.S. dollar, imports increased by 14 percent in 2003 to more than $1.165 billion, which represented 22.8 percent of total U.S. market demand.

But the Department of Commerce data understate the value of packaging machinery imports as defined by PMMI, inasmuch as they exclude conveying machinery and coding machinery, as well as some inspection equipment. Therefore, imports' share of the U.S. domestic market in 2003 was closer to 25 percent to 26 percent, which coincides with the findings contained in the 2003 PMMI Purchasing Plans Report.

While 2003's growth of 1.7 percent was less than stellar by comparison with most other years, it nonetheless was built upon a more solid foundation than in 2002, suggesting that genuine recovery is currently in progress. Evidence of the improvement is contained in the composite breakdown of results by machinery category. For, of the 16 defined packaging machinery categories detailed in this report, 12 were up and only four were down. This compares favorably with eight up and eight down in 2002. By the same token, however, the growth rates (both positive and negative) for all of the categories were in the low to mid single digits, again suggesting that the momentum of recovery in the traditional sense has not yet gathered a full head of steam. In addition to packaging machinery numbers, shipments of the closely related converting machinery category, comprising bagmaking and blister/clamshell thermoforming machinery, fell by 3.2 percent to $122 million.

As they have in prior years, several trends and developments, in combination, contributed to the results reported for 2003. Also as before, the confluence of demand drivers and deterrents inherently unique to individual machinery categories entered into the net outcome cumulatively. In addition, there were technological, economic and regulatory factors that commonly affected all categories in one way or another.

Looking forward, U.S. shipments of packaging machinery are forecast to grow at a cumulative annual rate of 3.9 percent over the next three years from an estimated $4.889 billion in 2003 to $5.491 billion by 2006 in constant 2003 dollars. The aggregate forecast is based on the cumulative outlook for all of the 17 defined packaging machinery categories.

The overall packaging machinery shipment outlook is also based heavily on the following macroeconomic assumptions and expectations:

The fundamental assumption underlying the three-year growth forecast for packaging machinery shipments is that the U.S. economy will continue to grow—albeit unevenly—during the period. Following a reasonably strong 2004 (with GDP gaining in the range of 4.0 percent to 4.3 percent), economic growth is expected to moderate in 2005 (3.0 percent to 3.5 percent), and then reaccelerate in 2006 (4.2 percent to 4.6 percent). Consumer spending will also grow unevenly, reflecting the predicted restraining effects of higher interest rates and lack of significant job creation.

On the other hand, capital spending by the business sector, typically responsible for one-third of GDP, is predicted to increase at higher rates than both the GDP and consumer spending—essentially reassuming its recent prior role as the bulwark of the economy's strength. U.S. corporations, now flush with cash, are expected to spend more heavily for new equipment in order to achieve higher productivity and efficiency in their operations. The prediction of sustained economic growth is obviously contingent on the absence of any serious exogenous events or disruptions.

Capacity utilization by U.S. manufacturing industries will continue to improve at a gradual pace early in the period and then will rise more meaningfully toward 2006. According to the Federal Reserve Board, the rate for total U.S. manufacturing stood at 76 percent at the end of August 2004. While durable products manufacturing remained low at 73.7 percent, nondurable manufacturing, which is responsible for the preponderance of packaging machinery demand, had improved to 79.3 percent, up from 76.9 percent in 2003. Utilization by the food manufacturing industries—a key indicator for the machinery market—also improved to 81.7 percent from just over 80 percent in 2003.

With the generally acknowledged trigger point for meaningful expansion-related spending pegged at roughly 82 percent to 83 percent, it is likely that capital spending will benefit as the period progresses. It is worth pointing out that, in reality, the Fed rates may be understated, because data from the Institute for Supply Management have recently shown capacity utilization more in the 80-percent range, reflecting what is believed to be a more realistic assessment by manufacturers of their current capacity measurement. The likelihood is that the numbers are somewhere in between the two. Aided by the expected continuation of a favorable U.S. dollar exchange rate for at least the near term, as well as by further improvement in world economic conditions, the U.S. export environment is expected to remain favorable during the three-year period. In line with the predicted growth of the U.S. economy accompanied by only moderate inflation, interest rates are expected to rise in gradual steps.