The monthly data that measures inflation-adjusted consumer spending in the U.S. posted solid gains at the end of 2014, but so far this year the growth in this data has been sluggish. This is important for our outlook because consumer spending accounts for two thirds of the U.S. economy (as measured by the GDP data), therefore a strong economic recovery depends on a healthy and vibrant consumer sector. It is especially important to the outlook for the plastics industry because the consumer sector is ultimately the biggest driver of demand for plastics products.
Be careful to note that consumer spending has expanded this year, but the rate of growth in the first quarter decelerated from the rate in the fourth quarter. Americans have not reduced their levels of spending, but they are exhibiting some restraint. Other segments of the economy did experience some contraction. These include government spending, business investment, and net exports. The decline in these categories more than offset the modest increase in consumer spending, and that is how we ended up with a negative number for GDP growth in the first quarter.
Our outlook calls for a gradual improvement in both government spending and business investment for the remainder of the year. The decline in net exports will be a more persistent problem due to the rise in the value of the dollar and the slow growth in the economies of many of our major trading partners. When these factors are combined with steady improvement in the consumer spending data, the result will be steadily accelerating economic growth for the remainder of the year. This pattern will be very similar to the one we experienced last year.
For plastics processors, the most important part of this forecast is the expectation of a steady rise in consumer spending activity. The key element to this is the recent trend in inflation-adjusted disposable income. Disposable income is what is left once a household pays for taxes and other nondiscretionary items such as energy.
As the chart indicates, real disposable income has been growing at an accelerating rate for over a year. It is currently growing at an annual rate of 3 percent, and it is on a trajectory to get close to a 4 percent growth rate by the end of this year. This would be the strongest rate of growth since before the recession, and I believe this will have a strong positive effect on consumers' confidence levels and their spending behavior going forward.
The Great Recession was painful for many Americans, and the residual effects of this are still noticeable in the economic data. For instance, the savings rate is quite high by historical standards and household debt burdens as a percentage of income are quite low. Home ownership levels are quite low, and vacancy rates for residential rental properties are also low. Americans have shown a willingness to increase their purchases of automobiles, restaurant meals, and gasoline, but not much else.
American households have enjoyed a windfall due to lower energy prices over the past year, but the bulk of this has been used to pay off debt or it has been put into the bank. Up until now, only about one third of the savings from lower energy costs has been spent.
Households are also reaping the benefits of the steady rise in both the jobs and wages data. The trend in the wages data has been characterized by slower than expected growth throughout the recent recovery, but there is mounting evidence that this is changing. So with wages rising and price levels steady (or even falling) for many household necessities, I expect the sharp upward trend in the growth of real disposable income to continue in the coming quarters. And this faster rate of growth in incomes will quickly translate into accelerating spending on all types of goods and services.
One sector that does not get a lot of media attention, but which is already experiencing accelerating growth, is a category that the government classifies as consumer goods excluding high-tech, motor vehicles and energy. I think of these as everyday personal or household items that everybody uses on a regular basis. They are mostly low-cost, high-volume types of products.
I like to monitor this data for several reasons. First, it is relatively mundane. It typically does not go too high during periods of expansion, nor too low during recessions. Second, these are the types of products that are now manufactured in low-cost countries such as China. And finally, many of these products are either made from or packaged in plastic. Because of these reasons, any significant changes in the overall growth rate for these products are interesting to me.
And as the charts indicate, the recent acceleration in real disposable income that started in early 2014 and has persisted through the present corresponded with stronger growth in U.S. production of these consumer goods. In fact, the recent growth rate for these types of goods is looking pretty robust by historical standards. I should mention here that the actual U.S. output of these products is still about 7 percent below its all-time peak, but clearly this gap is narrowing.
My latest forecast calls for the growth rate in this data to drift upward to 3 percent by the end of this year. This would represent the strongest rate of growth in this sector in 10 years. This growth will be driven by improving jobs and wages data, an acceleration in new household formations, improving data from the residential construction and real estate sectors, and maybe even some re-shoring of the production of these products back from low-cost countries.
These categories may be mundane, but the underlying health of these industries (represented by the above-average rate of growth in recent months) bodes well for the entire U.S. consumer sector and a large segment of the plastics industry.
