Deeper numbers show plastics industry steady

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.

In the third quarter, the Fed's industrial production index for plastics products posted a gain of less than 2 percent when compared with the second quarter, and it was up less than 4 percent from the third quarter of a year ago. These figures indicate that the pace of growth in the plastics industry is slowing, but it is still positive. I have included a chart of the rate of growth in this data. It shows that the trend hit a cyclical peak late last year. Presently, the growth rate in the data is decelerating on a trend that is predictable, but there is nothing yet to indicate that it will fall below the zero-line which is indicative of a contraction.

Steady conditions for U.S. manufacturers

Another indicator that is useful when tracking the short-term trends in the plastics industry is the Manufacturing Index from the Institute of Supply Management. For many years this Index was known as the Purchasing Managers' Index, and like our Business Monitor Index, it is based on a survey of manufacturing establishments. The ISM Index has a base value of 50, so a value above 50 indicates that business activity levels for manufacturers increased during that period.

The major difference between our index and the ISM Index is that ours is strictly focused on the plastics industry while their index is spread out across the entire U.S. manufacturing sector. I frequently use the ISM Index as a macro-level indicator of business conditions for U.S. manufacturers, and then I compare it to our Business Monitor Index to gain insight into how the various segments of the plastics industry are performing.

In the latest three months, the ISM Manufacturing Index has an average value of 50.5, which suggests that overall business conditions for manufacturers during this time period were mostly steady. The details from this Index show that new orders and production levels have slowly expanded in recent months, but the overall Index has been dragged down by sharp declines in export orders, backlogs, and prices paid for materials.

So based on my analysis of these data, I will make the case that conditions in the plastics industry were steady, rather than down, in the third quarter when compared with the second quarter. But clearly the longer-term trend in the growth rates in all of these indicators has been gradually decelerating since the end of 2014, and if they slow down any further they will soon start to contract.