The Federal Reserve Board recently released its industrial production report for the month of May, and the overall numbers were disappointing. Total output for U.S. factories declined 0.2 percent for the month. This marked the fourth time in the past six months that domestic manufacturing output has posted negative growth.
This is not all that surprising because many manufacturers have been hurt by the sharp rise in the strength of the U.S. dollar. Because of the sluggish performance so far this year, I have modestly lowered my forecast for 2015 to a gain of 2.6 percent for total U.S. industrial production.
But I still expect steady improvement during the second half of this year.
The negative effects of a stronger dollar and the corresponding dip in oil prices will gradually dissipate in the future, and both of these developments will ultimately turn into positive factors in the overall U.S. economy. But it will take a few more months for all of the producers and consumers in the global marketplace to adjust. So right at this moment, the short-term negative effects are mitigating the long-term benefits.
On a more positive note, the total output for U.S. plastics products increased by 0.2 percent in May. The plastics industry is not quite as vulnerable to fluctuations in the currency markets as are some other industrial sectors, and the drop in crude oil prices is actually beneficial to the domestic plastics industry. The capacity utilization rate for the plastics industry also ticked up 0.2 percent, and now stands at 79.3 percent.
The prevailing trends in these data are important to plastics processors for a couple of reasons. First, all sectors of the U.S. plastics industry are affected ultimately by total industrial production. The plastics data and the overall data may occasionally diverge for short periods of time, but over the long run the trends are closely correlated.
On the accompanying chart I have plotted the rates of growth for both U.S. production of plastics products and total U.S. industrial production. Make note, this is not a graph of the actual output volumes. It is a chart of how fast the output data are growing. On this chart, anytime the plastics line is above the total line, it means that the production of plastics products grew faster than the total during the previous 12 months.
This chart illustrates a couple of interesting trends. First, it is clear that the long-term growth in total industrial production in the U.S. averaged somewhere in the range of 2 to 3 percent per year during the past 10 years. It dipped down much lower than this during the last recession, and the subsequent rebound was muted, but on average the growth rate has been pretty consistent.
This stability is a good thing. It inspires confidence because it requires strength. It encourages investment in productive assets with long life spans. I know that everybody is always hoping to be above average, and we all believe that faster is better. But the U.S. has a large, diverse, and well-developed economy. Strong, steady and sustainable is right in the sweet spot of where we want to stay.
Plastics data vs. other industries