New orders on the rise, a positive sign

Business activity levels continued to expand for most plastics processors in the first quarter, but the pace of growth remained subdued. This is according to the latest data from our quarterly survey of processors with which we calculate the Plastics News Business Monitor Index.

The index value for the first quarter of this year was 106.9. This was a modest improvement over the value of 104.6 registered in the fourth quarter of 2015, and it indicates overall business levels were steady-to-better for a majority of the survey respondents at the start of this year (a value greater than 100 signals a rise when compared with the previous quarter).

The best news was the solid increase in the new orders component of our index when compared with the fourth quarter of 2015. New orders data is a leading indicator for all of the other components of the index. This gain, combined with the rise in production levels for the majority of processors in the first quarter, indicates that the overall growth rate may soon accelerate.

This should come as welcome news because the growth in the plastics industry data was starting to stagnate. According to Federal Reserve Board data, the total output for the plastics industry was flat-to-down in the first quarter when compared with last year. In fact, the Fed data has been in a slow-growth mode for the past five or six quarters.

A closer analysis of the historical data shows that the overall trend in the plastics industry is an extremely reliable indicator of the underlying health of the U.S. economy. During the past five years, the pace of expansion in real GDP has averaged just about 2 percent. The rate of growth in the output of plastics products during this time is just about 3 percent. Lower resin prices and a surge in auto demand are two of the major reasons why the plastics industry has grown faster in recent years, but there should be no doubt that the domestic economy and the plastics industry are closely linked.

There is also little doubt that the trends in both GDP and plastics production data have decelerated during the past two quarters. The preliminary release of the first quarter GDP data (to be released shortly after the publication of this column) will likely generate a lot of talk about the possibility of a pending recession in the coming months.

I still believe that the economy is going through a “soft patch,” and that the pace of economic growth will accelerate moderately in the next quarter or two.

This outlook is mostly based on my belief that business levels for many processors will signify a recession well before it gets reported in the official GDP data. So as long as our Business Monitor Index is stays in expansionary territory, I am not overly concerned by a quarter or two of lackluster GDP data. Obviously this can change from quarter to quarter, so I hope you will continue to support our efforts by regularly participating in the surveys.

Setting matters of national importance aside, there is plenty here of specific interest to our readers. I have included a table that breaks our total index down by the type of processor, and then compares the first quarter values to the average values from last year for these categories. We have been conducting this survey and calculating this index for just over a year now, so as far as a time series goes, this indicator is still relatively new. But I am starting to get a feel for it.

Clearly, not all segments of the plastics industry move in lock step. We have always known this to be true, but now we have something better than anecdotal evidence to monitor the differences in the timing and magnitude of the trends in the various segments.

Based on my experience with this data over the past few quarters, I am encouraged by the first quarter results. The steady performance reported by the injection molders is heartening. This is a bellwether component of our index, and I am glad that the upward trend in this data persists. I am also encouraged by the increase in activity for the compounders. Based on where it comes in the production process, compounding should be a short-term, leading indicator for some other industry segments.

The rise in the blow molding data also is worth noting. Do not be fooled into interpreting the large increase in the blow molding index in the first quarter as a signal that there was a large jump in demand for blow molded products. An index value of 124 does not represent a gain of 24 percent in demand for blow molded products. Our indices are not designed to measure quantity like that. This large gain does indicate that a majority of respondents reported a rise in business activity. This might be the result of a gain of 2 or 3 percent in overall demand. We do not know the size of the increase, only that business levels improved and a lot of blow molders noticed it.