Bill Wood
ECONOMICS EDITOR
Published: March 26, 2014 2:08 pm ET
Updated: March 26, 2014 2:10 pm ET
Image By: Plastics News
The total output of plastics products by U.S.-based processors has escalated steadily through the first couple of months this year.
According to the Federal Reserve Board, the index measuring total production of plastics products in the United States was 93.5 in February (it was 100 in 2007 before the Great Recession). This was a gain of 0.5 points over the January reading, and it was a respectable 4 percent increase from the reading in February 2013. For the year to date, total output of plastics products is up 4 percent from last year. This follows a very strong 2013 when the annual gain in the volume of plastics products was a vigorous 6.4 percent.
So the plastics industry enjoyed solid momentum at the end of last year, but there was concern that the severe winter in the eastern half of the United States might have caused the recovery to stall in the first quarter of this year. The upward trend in the data did decelerate, but a rate of 4 percent growth during one of the harshest winters on record is a solid performance. This should instill confidence in processors that the recovery in the industry will be strong, and will likely even accelerate for many of them, in the springtime and during the rest of this year.
Our latest forecast calls for an annual gain of 5 percent in the total output of plastics parts in 2014. This would put the total volume of plastics products manufactured in the United States very close to the levels they were at prior to the Great Recession. So if this forecast is correct, then it will wind up taking nearly six long years for this industry to get back to its pre-recession levels.
This outlook for another robust gain in plastics part production this year is based on expectations of continued steady improvement in the economic fundamentals that drive demand for plastics products. All of the industry’s biggest end-markets are expected to register solid gains in 2014. These include: automotive, construction, packaging, medical and electronics. Gradually increasing household incomes and spending will combine with a steady rise in business investment to push real GDP growth up to the 3 percent-level this year.
The most important part of this forecast, and therefore the part that processors should monitor closely, is the expectation for accelerating growth in consumer incomes. The plastics industry performs best when the overall economic recovery is broad-based and consumer spending is driving the growth. But ever since the recession ended, the rate of growth in the consumer spending data has been lackluster. Certain segments (like automotive) have experienced a more rapid recovery than other sectors in recent years, but the trends in overall consumer incomes and confidence levels are still quite sluggish by historical standards.
This has resulted in a “chicken-and-egg” dilemma that the economy must muddle through before the United States will achieve the desired rate of long-term, sustainable growth. Increases in consumer spending depend on wage gains and other types of income growth. Growth in the income data is driven primarily by gains in employment. But many businesses have been reluctant to hire because the prevalent trend in consumer spending growth has been slow. Businesses have money to invest and hire, but so far they have lacked the will to do so.
It has taken more than five years to resolve this dilemma, but we should start to see significant progress towards resolution as this year progresses. Starting as early as the second quarter of this year, rising confidences levels and warmer weather will release pent up consumer and business demand. Supply chains will no longer be impeded by snow and ice, and travel delays and shutdowns will be a thing of the past. Household funds that had been spent on increased amounts of heating fuels will be re-allocated to other types of consumer goods.
So the harsh winter and slower start to the year notwithstanding, the U.S. economy could finally start to see some growth in the range of 4-5 percent later this year. This means that processors who supply the automotive sector will remain busy, and those who supply the construction, appliance and packaging sectors will get a boost upward.
One other factor that will generate further economic growth is a recovery in government spending. The negative economic impact of the fiscal austerity resulting from the budget sequester at the federal level will be greatly diminished, while total spending at the state and local levels will register much-needed increases this year.
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