(Nov. 21, 2008) — From the outset of the year, 2008 looked likely to be a difficult one for North American plastics processors due to a plethora of factors internal and external to the industry. Soaring costs of crude oil and natural gas led to quantum leaps in the costs of resins and additives. Customers balked at the pass-through of these raw material cost increases, insisting on “China pricing.” Profit margins were squeezed or vaporized entirely. Meanwhile, collateral damage from the bursting of the housing bubble, which actually began in 2006, spread like a plague to almost every segment of discretionary consumer spending.
Then, from September through the present, came the global financial crisis, eventually engulfing every developed and developing country. In the United States, a combination of misguided long-term and short-term policies converged to create a “perfect storm.”
The government and Federal Reserve Bank have responded aggressively and innovatively to the destruction in the financial system. However, their actions have generally been ad hoc, lacking an overarching strategy. Some depositary and investment banks were allowed to fail, whereas others were shepherded to safety through shotgun mergers and acquisitions.
One of the key features of the original bailout package had the government purchasing bad assets on the banks' books. This was prima facie absurd. There is no government agency better equipped than the banks themselves to value these toxic assets and market them. The potential loss to taxpayers was scary.
In mid-November, Treasury Secretary Hank Paulson came to this conclusion and announced that recapitalization of the banks would come, not through relieving banks of this responsibility, but rather through bank share purchases, where taxpayers might realize a positive return on investment.
A recently completed research program covering the glass-fiber-reinforced thermoset processors revealed an interesting dichotomy between those companies serving industrial product markets and those serving consumer product markets.
The former have, in the main, managed to grow their business serving customers in agricultural equipment, aircraft/aerospace, civil engineering, conventional and renewable energy generation, mining and military/defense.
Meanwhile, the latter have experienced depressed demand for consumer products — original equipment manufacturer and aftermarket automotive products, residential construction products, electronic gadgetry, boats and marine accessories, RVs and other recreational products. This dichotomy will likely persist through 2009 and perhaps into 2010 as well.
When will the pain end?
The scenario is hardly favorable for plastics processors relying on a rebound in discretionary consumer spending.
The excessive leveraging in which both lenders and borrowers engaged during the past five years simply has to be reversed. Financial sector deleveraging has to proceed, not just to precrisis levels, but to sustainable equilibrium levels obtained in the past.
Estimates of the extent of credit reduction required vary. One financial analyst speculated that financial sector credit would have to contract 37 percent to restore bank balance sheets to equilibrium.
For their part, consumers will have to restore their normal savings propensity. During the past decade, this household “safety net” declined precipitously from double-digits to essentially zero.
The incoming administration, therefore, faces a truly daunting challenge to get the country moving again. Even if the government bailout, however devised, exceeds $1 trillion, consumer spending — which accounts for two-thirds of gross domestic product and is the normal target of “pump priming” — cannot restore economic growth until the deleveraging ends and the valuation of assets regains equilibrium. This process has already begun, and it is likely to continue through 2009.
Moreover, it is unlikely that exports will serve as a meaningful substitute for deficient domestic demand since the U.S. dollar is now viewed as a safe haven and estimates of global economic growth in 2009 have been ratcheted down as well.
Some think that innovation — good old American ingenuity — will be the spark that gets the country moving again. This seems facile. Innovation is of little avail if domestic and global consumers don't have the cash and the confidence to purchase innovative products.
The key to restoring growth is, as always, productivity gains that lead to improved corporate cash flow that ultimately leads to increased demand for labor and capital.
That, along with restored consumer confidence after the purging that lies ahead, will create the necessary and sufficient conditions for growth.
Mooney is an economist and president of Plastics Custom Research Services in Advance, N.C.