Improving conditions for processors in 2005.

* U.S. production of plastics products will increase in 2005 by 5% to 6% over 2004. This is a healthy acceleration from the 3% growth in 2004. Our forecast assumes a continuation of trends such as increasing employment, moderate declines in the cost of energy and resins, gradually rising interest rates, and a steady to modestly lower value for the dollar.

At the end of 2004, the Federal Reserve Board's index of production of plastics products hit 110 (1997=100). The whole manufacturing sector, as well as the plastics industry, slowed a bit in the third quarter of 2004, but then regained its footing in the fourth quarter. The year-end index for plastics processors' output was still a bit below the peak level of 113.9 posted in the first quarter of 2000. But the current trend will push the index past that peak by mid-2005. The Fed's measure of capacity utilization for plastics processors was at 84% and rising as 2004 ended.

Motor vehicles flat

For the third consecutive year, the number of motor vehicles assembled in the U.S. will be flat or only modestly higher. The expected rise in demand due to improvement in the economy and employment will be offset by a steady rise in interest rates and the effects of three years of incentives and low-rate financing offers. But sales of new vehicles will still be relatively high at around 15 million units.

Packaging growth healthy

Demand for plastics packaging correlates with the trend in retail sales. After expanding at a robust 9% rate in 2004, growth in retail sales (minus autos) is expected to decelerate to a still-vigorous 7% in 2005. Sales in packaging-intensive categories such as food, drinks, healthcare, and cosmetics all posted solid gains of 5% to 7% in 2004 and are expected to grow by a similar amount in 2005.

Producers of plastics packaging have been hampered by the painful spike in resin prices over the past two years. But this trend will be reversed in 2005 and those processors that have survived will reap the double benefit of rising sales and falling production costs. Demand for plastics film as measured by our Film Business Index will advance 6% in 2005 afar growing by more than 7% in 2004. The Sheet Business Index will enjoy a rise of at least 8% in the coming year, following a whopping 14% gain in 2004. And finally, consumption of plastic bottles, as measured by our Blow Molding Index, will swell by 7% in 2005 after similar growth in 2004.

Construction slows a bit

The booming U.S. residential construction market will slow in 2005 as interest rates gradually move upward. After a 6% increase in 2004 to over 1.9 million units, new housing starts will decline 5% in 2005 to a still-robust 1.8 million units. The decline in existing home sales will be more precipitous, but that is partially because the increase in 2004 was so dramatic. After a jump of 8% in 2004 to just under 6.6 million units, sales of existing homes will fall 7% in 2005 to 6.2 million units. Once again, the forecasted total is still quite high by historical standards.

Spending for residential improvements, alterations, and repairs will post another year of growth in 2005. In 2004, total spending in this category increased 8% over 2003. This year, homeowners will increase spending on home improvements and repairs by 6%.

Another sector that will grow in 2005 is nonresidential construction. After sagging in 2003 and the early part of 2004, spending in this sector turned upward in recent months. For 2004 as a whole, spending on nonresidential projects rose 4% and will expand 6% in 2005.

Bill Wood, an independent economist specializing in the plastics industry, heads his own firm, Mountaintop Economics & Research, Inc. in Greenfield, Mass. He may be contacted by e-mail: [e-mail]