It is late summer, and we are already almost two-thirds of the way through the third quarter. But I find myself wanting to bask in the warm afterglow of the economic data from the second quarter a bit longer.
In case you have forgotten, that was the quarter when overall gross domestic product growth in the United States hit the 4 percent-mark, and the rate of expansion in the data measuring total output of the U.S. plastics industry exceeded 6 percent when compared with the previous year.
The increase in the production of plastics products so far in 2014 has been driven primarily by strong demand from the durable goods sector. The data measuring output levels for the motor vehicles and appliances industries also enjoyed robust growth in the second quarter. And as usual, there was another strong performance registered by the medical supplies and equipment sector. So as we head toward the end of the year, many segments of the plastics industry have good reason to feel optimistic about the months and quarters ahead.
But lest we start feeling too exuberant about future prospects, I am reminded that not all sectors of the plastics industry are yet participating in the current stretch of above-average expansion. The data from certain segments of the packaging sector as well as the consumer products sector are still stuck in a trend of modest growth. One packaging executive recently lamented, “We are living in a 1 percent world.” My research indicates that the products included in this category include: caps and closures, tubs and containers, bottles for liquid food and household chemicals, and housewares.
Now modest growth is better than no growth, or even negative growth, but it is not enough to inspire greater confidence in the future. Processors in this situation are unlikely to hire additional workers or invest in new plants and equipment. They have been willing to replace worn-out or obsolescent capital stock with new, more efficient machines, and thus they are able to meet the small increases in demand through productivity gains. But many of them are still waiting to see firm evidence of a sustained rise in consumer demand before they invest more aggressively.
Compounding the problem of slow growth in the demand for these products has been the rise in the prices paid for plastic resins. Many of the products in this category are high-volume, low margin products, and therefore the price of materials represents a large portion of their total cost of production. The overall rate of inflation in the U.S. may be below the Fed’s target levels, but the price of resins has marched upward at a pretty good clip during the past few quarters.
If there was such a thing as fairness in the universe, then the fact that prices for most resins are at or near all-time highs would correspond with the fact that demand for these products was at or near all-time highs. Or maybe processors should occasionally have the option of passing along some of the higher prices paid for resins to their customers. But for many manufacturers of these products, neither of these scenarios is true. So it is understandable if their level of optimism about the future is subdued.
Nevertheless, there are solid reasons for optimism starting to emerge. I will not pretend to have any special insight into the future price trends for plastics resins, but I do know that there are expectations of additional supply coming online in the near future. This should serve to keep the ceiling on future price increases, if not push prices lower.
I do have some experience predicting the direction of trends in consumer demand for plastic products, and the outlook for these trends is encouraging. As the chart above illustrates, the growth rate in the data measuring U.S. production of consumer products (excluding high-tech, motor vehicles and parts, and energy products) hit a cyclical low point just below the 1 percent-level in the first quarter of this year. The growth rate has gradually increased ever since. In the second quarter, output expanded by 2 percent when compared with the previous year.
Our forecast calls for this rate of expansion to be sustained through the end of this year, and the annual growth for 2014 will come in a little better than 2 percent. An increase of 2 percent may not seem all that fast, but it will represent the strongest rate of year-over-year growth in the production of this category of consumer products since 2005. And I believe that it is quite likely that the rate of growth will continue to accelerate through 2015.
Processors who supply these markets understand that they are slow, but steady by nature. Most of these types of consumer and packaging products are nondurable goods. Unlike durable goods such as autos and appliances, the bulk of the products that comprise the nondurable goods sector tend to be inexpensive to purchase and non-discretionary. Included on this list are things like food, health and beauty products, and household chemicals. Demand for these products does not accelerate very rapidly during economic recoveries, nor does it decline severely during recessions.
That is not to say that demand for these products is totally impervious to fluctuations in the economic cycle. The chart clearly shows that demand for these products will be strongest during periods that the economy is growing the fastest. And there was definitely a steep decline in the last recession. So as the pace of the current economic recovery gathers momentum demand for these products will be lifted.
An increase in consumer spending for nondurable goods will correlate with improving employment and household income data. We expect the gains in the number of jobs will accelerate in the coming months, especially in the construction sector. Rising employment data will eventually push up household incomes, and it will also spur consumer confidence. Many manufacturers of food, health and beauty, and housewares products will recognize this period of rising confidence and incomes as an opportune time to introduce new products to the market. All of this will translate into increased demand for packaging products as well as other types of consumer nondurables.
So for the rest of this year, our prediction for market conditions in these sectors is best described as a continuation of the slow, unspectacular gains that have characterized these markets for the past few years. But processors will soon start to see signs of accelerating growth in these sectors, if they are not already seeing them. The annual gain of 2 percent this year should rise to at least 3 percent in 2015.