Now that the preliminary round of December data is officially in the books, I can state unequivocally that 2014 was an outstanding year for the U.S. plastics industry as a whole.
According to data recently released by the Federal Reserve Board, the total U.S. output of plastics products expanded by a vigorous 6.8 percent in 2014 when compared with the previous year. This followed the strong rise of 6.1 percent in 2013. These gains of the past two years marked the first time since 1993-94 that the plastics industry has registered annual growth in excess of 6 percent in back-to-back years.
It is also worth noting that there was an orderly pattern to last year's expansion, and this pattern corresponded favorably to the pace of growth that was emerging in the overall economy at the time. As the chart indicates, the growth rate in the first quarter of 2014 was a solid 4.5 percent. Not too bad from a historical perspective, but it was a deceleration from the quarterly rates posted in 2013. You will recall that much of the U.S. was in the throes of a severe weather pattern at the start of last year. The weather was so bad it had a noticeable negative effect on this country's economic activity.
As winter ended and we finally emerged from the polar vortex, the economy really got hot. As the chart indicates, the output of plastics products also accelerated quickly. The increase was at a much faster pace than the rate of change in the overall GDP and most other sectors of the economy. In the fourth quarter, the rate of growth was nearly 9 percent when compared with the same quarter from a year earlier. This was more than double the long-term historical average for quarterly growth in our industry.
Rapid growth rates of this magnitude are not unusual during the early stages of a business cycle recovery when an industry is just starting to come out of a recession. People tend to over-react out of fear at the bottom of a recession (or a stock market trough), and the data can snap back sharply once people realize their mistake and take the steps necessary to correct it.
This almost always signifies the end of the downtrend — a sharp downward plunge caused by the fear in the moment followed by a sharp bounce upward as cooler (and smarter) heads prevail. Such was the case in 2010 when the growth rates in plastics industry data rebounded from the severe, panic-induced declines suffered during the recession year of 2009.
But there was no downward plunge in the data in 2013 that would presage the unusually strong gains in the following year. In fact, 2014 marked the fifth year of the current recovery, which means that it is pretty mature by historical standards. Now this recovery might last another five years, or even longer, but to get a quarterly growth rate of nearly 9 percent at this stage of the cycle is remarkable to me.
As a natural-born economist I enjoy all of this historical analysis, but the real question is, as always “What happens next?”
First I will say the combination of the trend in output steadily accelerating throughout all of 2014 and also attaining a high level of growth at the end of the year bodes well for continued gains in production levels in 2015.
This would not be true if I expected a significant slowdown in the end-market demand for plastics products, or if the production of plastics products got too far ahead of the underlying end-market demand at the end of last year and inventories of plastics products were starting to accumulate. At the moment, I cannot find evidence that supports either of these scenarios.
The Census Bureau compiles and reports data on both inventories and shipments of the plastics industry. The data from 2014 as a whole, and the fourth quarter in particular, indicate that the inventory to shipments ratio for the plastics industry was steady and relatively lean. In other words, there was no reported accumulation of plastics products inventories.
Of the major plastics end-markets, the Fed data show that the growth rates in the production levels for autos, appliances and medical products were all in the range of 5 to 6 percent in 2014. Data from the Census Bureau show that new orders for durable goods also advanced 6 percent last year, and new housing starts increased by 9 percent. So the end-market indicators are strongly supportive of the recent trend in the data for plastics products as we enter 2015.
My latest forecast is for a gradual deceleration in the quarterly growth rates as the year progresses, but the annual growth will still come in at a solid 5 percent. I do not think we will quite get up to 6 percent as we did in the previous two years, but a gain of 5 percent is still faster than the expected growth in the overall GDP, which is forecast to be in the range of 3.5 to 4 percent.
It was not unusual for the plastics industry data to post stronger annual growth than the GDP data during the decades of the ‘80s and ‘90s, but the industry's average annual growth rate was substantially slower than the overall economy from 2000 through 2009. But during the past three years (2012 through 2014), the industry returned to a strong growth mode, and I expect this trend to continue through 2015 as well.
For those of you who take a deeper interest in these data (like I do), I can share some interesting facts that will add historical perspective to this current trend: The Fed's data on industrial production of plastics products is reported as an index in which the monthly average from 2007 is equal to 100. In the fourth quarter of 2014, the monthly average of the Fed's index was 100.9. So it took seven long years, but the U.S. plastics industry has finally recovered to its pre-recession level.
And here is something to watch for this year: According to the Fed's data, the year 2006 represents the high-point in total output of the U.S. plastics industry. If my forecast of a 5 percent gain for this year proves accurate, then 2015 will be the year with the second highest total for output of plastics products. If my forecast turns out to be a little too conservative, and we get another year with a growth rate higher than 6 percent, then 2015 surpass 2006 to become the most productive ever for the U.S. plastics industry.