Consumer spending accelerates in second quarter

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The United States Commerce Department recently released the advance estimate of U.S. gross domestic product in the second quarter of 2014. Their data indicate that real GDP expanded by 4 percent in the second quarter. This rate of expansion was considerably faster than most analysts expected, and it more than made up for the decline of 2.1 percent in the first quarter.

This GDP data for the second quarter will be revised a couple of times in the coming months, but barring something dramatic, I expect that it will most likely stay well above the 3 percent level. I also expect that this will be the first in a string of several quarters of stronger-than-average economic growth.

The coming growth rates may not always be as high as 4 percent, but they will likely be at least 3 percent through the end of 2015. The main reason for my optimism is the steady improvement in the data measuring personal consumption expenditures, more commonly referred to as consumer spending.

Inflation-adjusted consumer spending increased at a rate of 2.3 percent in the second quarter when compared with the same period from a year earlier. This was comparable to the 2.2 percent rise that was registered in the first quarter. What is particularly important to the manufacturing sector, including plastics processors, is that spending for durable goods jumped by a robust 6.9 percent in the second quarter when compared with the previous year. This followed a rise of 4.6 percent in durable goods spending in the first quarter.

This data suggests that consumers are increasingly comfortable in their decisions to purchase big-ticket items such as automobiles, appliances and home electronics. The slow but steady march upward in the monthly employment data is finally at a level where consumers are starting to feel it.

To be sure, the economy still has a long way to go before we get to full employment. But consumer confidence levels are rising, workforce participation rates are no longer declining, banks are lowering their lending standards for mortgages and there is even evidence of rising wages in some sectors. I will argue that we are in the early stages of what will become a long release of the pent-up demand for our aging durable goods stock.

This increased propensity to consume durable goods is already starting to have a positive effect on the data from the plastics sector. According to the data compiled and reported by the Federal Reserve Board, the total U.S. output of plastics products jumped by 6.2 percent in the second quarter when compared with the same period a year ago.

By now everybody knows that the U.S. economy is driven by consumers. We have the biggest economy in the world because we buy the most stuff. And we cannot have a full-fledged economic recovery unless the consumer sector leads the way. In 2014, the measured U.S. economy will be over $17 trillion. About two thirds of that total, or just about $12 trillion, will be accounted for by consumer spending. The bulk of the remainder is divided between government spending and investment in buildings and equipment.

Of this $12 trillion in consumption, $4 trillion is spent on manufactured goods. This is where the end-markets for plastics products get counted. There are two main categories of goods that consumers purchase: durable goods and nondurable goods. Durable goods are intended to last at least three years and they include automobiles, furniture, building materials and appliances. Obviously, these are big end-markets for injection molded parts and extruded products such as plastic pipe and profiles.

Durable goods tend to be more expensive in price, and they also tend to be more discretionary. As a result, the data on spending for durable goods is more volatile. The markets for these products are more vulnerable to things like rising interest rates or economic recessions. In the last recession, the rate of decline in spending for durable goods was more than double the rate of decline for total consumer spending.

This volatility can also result in large gains when the economy recovers. This year, spending for durable goods is on pace to grow by more than twice the rate of total consumer spending. The processors who supply the durable goods end-markets will be well-advised to monitor this trend.

You will want to know the direction of the trend. (Is spending for these products increasing or decreasing?) And also the momentum of the trend. (Is the growth in spending accelerating or decelerating?) You should determine the rate of growth when compared to the same period of a year ago, and you should have a sense of what the year-over-year growth rate has been for the past few quarters.

The year-over-year rate of growth in consumer spending for durable goods spending has been between 6 and 7 percent for the past couple of years, and this is the main reason that total U.S. production of plastics products is currently growing at a comparable rate. At this pace, market conditions can change quickly, and you will need to be forearmed with this information if you want to prepare for changes in materials prices, inventory levels and investments in new employees and equipment.

And while the durable goods sector is expected to enjoy the stronger growth rates in the coming quarters, this does not mean that things will be unexciting for the nondurable goods end-markets. Nondurables include food, health and beauty products, household chemicals, clothing and gasoline. These products tend to be less expensive than durable goods, and they also tend to be non-discretionary. They also are the biggest end-markets for plastics packaging products.

The growth rates for these goods tend to be less volatile, and these markets are less vulnerable to the changes in the overall economy. So the growth rates are more reliable, but they do fluctuate and they do tend to be stronger during periods of more rapid economic growth. Processors who supply packaging products will likely experience a noticeable increase in demand in the coming quarters because spending for nondurable goods will exhibit sustained annual growth well above the 2 percent level.