Our latest Plastics News Business Monitor Index registered a value of 98.7 in the third quarter. A value below 100 for this index indicates that overall business activity levels for plastics processors slowed when compared with the previous quarter. So at first glance, it appears that business levels declined modestly in the latest quarter.
However, a closer inspection of the data reveals that business conditions might not be as bad as the headline number suggests. As the table indicates, processors reported overall growth in new orders, production and the number of employees for the third consecutive quarter. These gains were mitigated by sharp declines in export orders, backlogs and prices received.
But as I have stated before, the drop in the prices received should not be interpreted negatively at this point. There have been times in the past when a drop in prices for plastics products was the result of weakening market demand, but this time it is the result of the sharp decline in resins prices. This actually has a positive effect on demand for plastics products in the long run.
So if we were to re-calibrate the weighting of the “prices received” component of the index, we would most likely come up with an adjusted value of just over 100 for our index in the latest quarter.
For the purposes of historical comparison, I typically do not adjust things whenever I wish or if the data does not suit me. But the sharp drop in resins and crude oil prices so far this year is not a typical situation in this country, so some short-term adjustments to the way we interpret such market indicators is warranted.
Due to the strong rise in the value of the dollar this year, there is little doubt that export demand in declining. And slower growth in total orders, combined with steady production levels and rising payrolls, explains the drop in backlogs last quarter. So the data clearly indicates that the upward momentum in the plastics industry waned in the third quarter. But I am not yet ready to concede that the activity levels actually declined. I believe that an accurate description would be that market demand was mostly steady.
This explanation is corroborated by the third quarter performances in other data series that are pertinent to the plastics industry. Every month the Federal Reserve Board compiles data on the total U.S. production of plastics products. Just to be clear, this data measures the volume of plastics goods produced in America rather than the value of goods produced.
This distinction is important because the recent decline in the prices received for plastics product will most assuredly result in a decline in the dollar value of these products. But, as stated above, this does not mean that market demand for plastics products is actually declining, or more importantly, that plastics manufacturers are losing money.