Investment needed to spark faster growth

The fundamental, long-term objective of every successful business owner is to grow the business. Nobody who stays viable over the long run just wants to be average, and nobody just wants to maintain the status quo. Instinctively, we want to grow our business, our industry and our economy.

This does not mean we are greedy. It means that we don't want to die prematurely. Because that is the choice — grow or die. The world is a very competitive place. If you do not continually seek to expand your business, then eventually a competitor (or one of these new-fangled things called a disruptor) will take it away.

I do not need to convince you that a growing manufacturing sector in the United States will not only be good for the plastics industry, it will also be good for the nation as a whole. But it will not happen by accident, we must assertively commit to a plan of growth.

As everybody knows by now, Americans are currently living in a 2 percent world. The U.S. economy has expanded by just about 2 percent per year every year since the Great Recession ended, and that streak looks like it will continue for the foreseeable future. Comparatively speaking, this pace of growth isn't bad. In fact, it is better than what most other developed nations have experienced during the past decade. Our unemployment rate is low, as is our rate of inflation, our mortgage rates, and the cost of most energy products.

So what is wrong with steady, 2 percent growth? Simply put, it is not fast enough to suit us. We want to grow faster. The 55 miles per hour speed limit on the highways was not fast enough (a shout out to Sammy Hagar seems warranted here), and 2 percent GDP growth is not fast enough. It is certainly better than a recession, but it is becoming increasingly clear to me that a 2 percent rate is too close to a recession for us to get comfortable.

OK, we do not need economists to tell us we want to grow faster. But economists figured out a long time ago that there are really only two ways to grow an economy in the long term: add more people or make the population more productive.

Experience has shown that adding more people can also have substantial negative consequences. This is the problem the European Union is currently facing due to the surge in immigrants from the Middle East. So I prefer the choice of making the population more productive. In the parlance of economists it is called raising the labor productivity rate. An increased productivity rate creates the added benefit of raising the living standards of the population. For me it is an easy choice of quality over quantity.

How do we do this? The only way to raise productivity to a higher level for a sustained period of time is through a steadfast commitment to investment. We must continually invest a large portion of our time and money and effort in research, education, training, infrastructure and capital equipment.

I have included two charts this week. One tracks the 12-month growth rate for U.S. investment in industrial equipment over the past 10 years, and the other is a graph of the rate of labor productivity growth for U.S. manufacturers during this same period.

These charts illustrate a couple of important trends, one is obvious and the other is more subtle. The first is the low rate of productivity growth for U.S. manufacturers during the past four years. The rate of productivity growth is hovering just above the zero-line. The pace of investment has increased moderately in the past two years, but it looks like we need to do more.

The second and less conspicuous trend is the relatively low rates of growth in both investment and productivity over the past 10 years. A closer look at the data shows that the average annual rate of growth in investment in industrial equipment is 2.4 percent. During this same period, the average annual rate of growth in productivity levels for manufacturers is 2.5 percent. We instinctively wish the growth rate was higher, but we are hesitant to invest more aggressively.

Aggressive investment used to be the hallmark of the American economy, but ever since the last recession we seem to have lost our mojo. Taking a different perspective, the rate of return on a 10-year Treasury note is currently 1.7 percent. History shows that the yield on the 10-year note should be about the same as the growth rate in the overall economy. It used to be that when interest rates would get too low, it spurred business owners to increase their pace of investment.

We currently have interest rates at the lowest levels we will likely see for the rest of our lives, yet the pace of investment in new equipment is subdued by historical standards. It is difficult to explain this using rational economic theory. As a nation, we will ultimately come to regret our collective reticence to invest more vigorously. The real, long-term driver of gains in our national wealth and prosperity is productivity. Sustained growth in productivity is only achieved through investment.

Nobody has learned this lesson any better than those of us in the plastics industry. The U.S. plastics industry is enjoying a renaissance due to strong growth in investment over the past few years, and productivity levels are rising. After a long period of sluggishness during the previous decade in which investment levels were deficient, the plastics industry is now a growth leader amongst U.S. industries. Let's commit to a continuation of this trend.