The appliance market is changing.

According to data from the U.S. Census Bureau, shipments of domestically made household appliances hit a cyclical peak in the third quarter of last year and have declined steadily ever since. This downtrend is corroborated by the Federal Reserve Board's industrial production data for the appliance industry and by our own index of injection molders' output of plastics appliance parts. Our forecast calls for the downtrend in appliances to hit bottom in the latter part of this year and then start to rise again in 2008. For 2007, annual shipments will decline 5% after a gain of 2% in 2006.

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A strong factor in the slide in appliance demand is declining residential construction. The cyclical peak in housing starts came six months before the peak in appliance shipments, and through the first half of 2007 housing starts are still in freefall. In 2006, new housing starts dropped by 13% from the previous year and are down another 30% so far in 2007. This downward spiral will stabilize later this year, and the industry should return to growth in 2008. For 2007, housing starts will fall 15% compared with 2006.

The decrease in residential construction spending and the corresponding drop in residential real-estate activity have also resulted in a decline in median house prices and home equity values. This means that people are less able to use home equity to finance purchases of things like appliances.

So the short-term outlook for U.S. appliance demand will follow the trend in the residential construction with a lag of about six months. But there are longer-term issues in the appliance industry that also bear watching. The number of appliance manufacturers has consolidated in recent years, and anecdotal evidence suggests that the number of injection molders that supply these manufacturers has also shrunk. Compounding this problem is the outsourcing of parts to lower-cost countries such as Mexico and China, as well as growing imports of finished appliances.

This means that the volume of domestically produced appliance parts is more vulnerable to cyclical downturns than the overall appliance industry. Therefore, demand for U.S.-made plastics parts has declined even more than the overall appliance industry during the current cyclical low, and it will not rise as high during the next cyclical upswing.

There is one other market factor that will become increasingly important in the coming years--energy efficiency. Until recently, American appliance buyers have been more interested in things like appearance, power, large capacity, and convenience-enhancing features. This is in contrast to the European market where energy efficiency and space constraints are a high priority. But the rapid escalation in energy prices is changing the minds of many Americans.

This means that there will be increasing pressure on U.S. appliance manufacturers to provide a new and different set of products for the domestic market. Domestic processors who can render expertise in design and materials along with the ability to get new products to market quickly will have an advantage over suppliers from overseas. Plastics will play a major role in alleviating energy problems for U.S. consumers, but the next generation of parts will be more sophisticated in design and in the materials used to make them. To manufacture these parts, processors will be required to use more technically capable machines and tooling.

Bill Wood, an independent economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield, Mass. He can be contacted by e-mail at [e-mail]. His monthly Injection Molding and Extrusion Business Indexes are available at www.ptonline.com.