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December 19, 2014 01:00 AM

Consumer spending to continue on its upward trend in 2015

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    Plastics News

    'Tis the season of the consumer. And for that reason, it is also the season for reports on consumer activity.

    Analyses of the data pertaining to retail sales, e-commerce, Black Friday, Cyber Monday, etc. are regular features in the business press this time of year. It is hardly news that the fourth quarter is an important time of year for most retailers and also for manufacturers of many types of plastics products. But most of us are in business all 12 months of the year, so what should we expect once the holidays are over?

    To get a better understanding of what drives consumer spending — not just during the holiday season but throughout the entire year — we need to look at the underlying trends in employment and earnings. The Bureau of Labor Statistics compiles and reports data for each month that tracks the changes in employment and average earnings. It takes a little digging, but this data is easily accessed on the BLS website, and it contains valuable information for processors who supply the U.S. consumer markets.

    The best-known and most often cited data series from BLS is the report on the number of new jobs created each month. The most recent report showed there were 321,000 new jobs created in the month of November. This is a strong total that was much better than what most analysts expected, and it was well above the average of 233,000 jobs each month so far in 2014.

    Obviously, the trend in the number of new jobs created each month is an important indicator of the health and vitality of the U.S. economy. Since the recovery began more than five years ago, it has been characterized by a growth rate in the jobs data that is agonizingly slow. So a robust number like the one we got for November is welcome news to everybody. However, I am always more interested in the recent trend in a data series than I am in just one number. So it pleases me to report that the trend in this data is clearly upward, and I expect that it will continue to rise throughout 2015.

    Now while the number of new jobs created each month gets most of the attention, it is not really what drives the economy. Consumer spending accounts for two-thirds of the total GDP in the U.S., and growth in consumer spending is driven by growth in household incomes. People who get new jobs will certainly have an increase in their earnings, but the newly employed represent only a small fraction of the nation's workforce. So what about the people who already have jobs? How are they doing at the present time?

    BLS also compiles monthly data on the average number of hours worked per week, the average wages paid and the average weekly earnings for employees. Like most manufacturers, managers in the plastics industry have two choices if they want to put more money in their employees' paychecks: they can raise their wages, or they can give them more hours on the job. The hourly wage multiplied by the number of hours worked in a week will equal weekly earnings. The accompanying chart compares the recent trends in the earnings data for workers in all industries with workers in two sectors of the economy that are of interest to the plastics industry — manufacturing and construction.

    As the chart indicates, the earnings for all workers are rising steadily. It also shows that workers in the manufacturing and construction sectors earn significantly more than the average worker each week. That is the good news.

    The less-than-good news is that the rates at which these lines are rising is not particularly fast. During the past five years, weekly earnings in the manufacturing sector have escalated by an average annual rate of 2.3 percent. The other two lines have risen a bit faster, but not much. If you adjust these earnings data for inflation, you get a growth rate that is below 1 percent per year. This slow pace of earnings growth has been the biggest impediment to faster growth in the overall U.S. economy during the past five years of this recovery.

    But as I said earlier, the growth rates for the employment and earnings data are starting to accelerate.  I expect this trend upward to continue for the next year. These gains will spur higher levels of consumer spending for the foreseeable future, especially in the end markets that are important for plastics processors. These include autos, residential construction, medical products and packaging.

    That is positive for the near-term, but there is a longer term trend that also bears mentioning. The number of jobs is currently rising at an accelerating rate, but as we can see, not all jobs are the same. And any serious forecast of consumer trends must account for the trends in just what kinds of jobs we are talking about. A closer look at the employment data reveals the U.S. economy is not yet creating the right mix of jobs.

    The types of jobs that are growing the fastest at the present time are those in the low-paying industries. These low-wage jobs comprise about half of all of the jobs created so far in the recovery. Now any jobs are better than no jobs, but over the long run we do not want an economy where half of the people employed only have a low-wage job. The high wage industries are also growing at a strong clip by historical standards, and that is also good news.

    The bad news is that the group that is growing the slowest, at a rate that is far too slow for long-term economic health, is the middle tier defined as those with annual earnings of $38,000 to $68,000 per year. This is the tier that includes most of the manufacturing and construction jobs. These are the people who make things and build things. These jobs belong to the middle class, and the middle class is the backbone of the American economy. For our nation's long-term prosperity, we need a strong middle class. And these types of jobs are not growing fast enough at the present time.

    To summarize, the trends in the employment and earnings data clearly indicate that consumer spending will expand in 2015. This means that business conditions for plastics processors will continue to improve. But we still have some work to do before the U.S. economy is producing at its full potential.

    Now I am acutely aware of the fact that the trends in employment, and hours worked, and earnings may seem like topics only an economist could love. But putting more money in worker's pockets is the best way to grow the economy. It is the best way to run a business, or for that matter, a country. These are truly numbers that matter. It will be my pleasure to report on our collective progress in the New Year. Here's wishing you all a healthy and prosperous 2015.

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