The long, harsh winter is finally over, and the first quarter of the calendar is history. So now is an appropriate time to review the emerging trends in the economic indicators, compare these trends with our forecasts, and make any necessary adjustments to our outlook for the rest of the year. I continually preach that forecasting and planning are not once-a-year exercises, but rather are never-ending management processes. In other words, forecasting means re-forecasting.
This is particularly true for managers in the plastics industry. Our industry is more competitive than ever, which means that there is very little margin for error. Demand for plastics products is closely tied to the activity levels in the overall economy, and the trends in the plastics industry data move in the same direction as the data from the overall manufacturing sector.
At the end of last year I forecasted better than 3 percent growth in real GDP in the U.S., and 5 percent growth in the total output of plastics products. But a lot has changed in the past three months.
We will not get the official GDP data for the first quarter until later this month, but based on the other indicators that have been released it is clear that the growth rate in the U.S. economy decelerated in Q1. The consensus estimate for real growth in annualized GDP during the past three months is somewhere between 1 percent and 2 percent. This is well below the long-term, optimal rate of around 3 percent, and if this estimate is accurate, it would be the second consecutive quarter of sub-par growth in the economy. Real GDP expanded by a disappointing 2.2 percent in the fourth quarter of last year.
This pattern of decelerating growth is also evident in much of the manufacturing data from the first quarter. One notable example is the ISM Manufacturing Index (formerly known as the Purchasing Managers Index) which averaged 52.6 in the first three months of this year. This is markedly lower than the 56.9 average from the fourth quarter of 2014. The March reading of 51.5 for the ISM Manufacturing Index represented the fifth consecutive monthly drop.
Just to be clear, we are not talking about any contractions in these data. The ISM data has remained above the breakeven threshold of 50, and GDP growth for the quarter almost certainly will be positive. But the upward momentum in the data that we enjoyed in the middle of 2014 clearly diminished in most recent two quarters, and this has created some anxiety about stagnation in the U.S. economy. This anxiety was heightened when the most recent employment data for March came in well below expectations.
As always, the question that persistently confronts both economists and business managers alike is, “What's next?” Will the data remain on a downward trajectory until they slip into a period of contraction or even an economic recession? Will the economy continue to just bump along at a slow rate of growth indefinitely? Or is this a short-term, consolidation phase in the economy—caused mostly by one-time factors — that will soon be followed by a new phase of stronger economic growth.
Robust expansion on the horizon
After looking at the available data from the first quarter, especially the data from the plastics industry and also the indicators of consumer spending, I believe that the recent period of sluggish growth is temporary and that a trend of more robust economic expansion will soon emerge. The data from the first quarter came in below my expectations, but I am not yet compelled to change my annual forecasts for 2015. I believe that just as it did last year, more vigorous growth will return in the spring.
One reason for my optimism is that for the year-to-date, the total U.S. output of plastics products is up about 9 percent over last year. This is much stronger than the historical average. This rate of growth will moderate in the coming months, but I still expect strong growth throughout the year. And as I said, the trend in the data for the output of plastics products is a good indicator of the fundamental activity levels in the overall economy. Plastics products are used in a wide variety of end-markets. They are quickly manufactured, so there is typically not a lot of inventory in the pipeline. The trend in the plastics data is strong when the economy is strong, and it slows as the economy slows.
Solid consumer demand for autos is one underlying trend that continues to generate strong demand for plastics products. It is also evidence that consumer spending, which accounts for two-thirds of the GDP data, will continue to steadily expand. Sales of new vehicles slipped a bit in February when the winter weather was particularly nasty, but they came roaring back in March. Pent-up demand, a persistent rise in household income, and steadily improving access to credit will push vehicle sales to a total of almost 17 million units this year.
Big growth in home sales
Another market that appears to have turned the corner is residential real estate. According to the National Association of Realtors, pending home sales are up 12 percent over this time last year. The same factors that are generating demand for cars are also spurring home sales: low interest rates, rising incomes, and improved access to credit. This market also has a lot of pent-up demand, caused by the suppressed levels of new household formation, that should start to be unleashed in the second half of this year as consumers become increasingly comfortable with both their debt and income levels.
Sales of cars and houses are the cornerstones of the consumer activity in this country. These markets were unquestionably affected by the severe winter, but the underlying demand is still strong. And it is worth noting that the strong vehicle sales and pending home sales data in the first quarter corresponded with a high level of consumer confidence during that time.
The well-documented constraints on the economy caused by the harsh winter weather and the shutdown of the West coast ports are now behind us. The sharp rise in the value of the dollar inhibited growth for U.S. exports in Q1, and the sharp drop in the price of crude oil resulted in some contraction in the energy sector. But both of these trends are examples of “short-term pain, long-term gain.” The initial shock of these trends was evident in the first quarter data, but the economy will adjust gradually. In the second half of 2015, the economy will start to benefit from these trends.