Spending on goods should push plastics demand

The U.S. economy expanded at a pedestrian rate of 1.4 percent in the first half of this year when compared with the same period in 2015.

That is following the advanced estimate released by the Bureau of Labor Statistics saying real GDP in the U.S. grew by an annualized rate of 1.2 percent in the second quarter of this year.

This marked the fifth consecutive quarter that the pace of growth in the overall economy decelerated when compared with the same quarter of a year earlier. And the gain of 1.4 percent so far this year is substantially slower than the increase of 2.6 percent registered for all of 2015. My earlier forecast for the change in real GDP called for an annual gain of 2.8 percent this year, but based on the figures from the second quarter, I have lowered this to a gain of 2.4 percent. This will bring the annual gain right back on trend with the yearly increases from the past six or seven years.

The trend in domestic demand for plastics products is closely tied to the trend in the overall economy. The deceleration in the GDP growth over the past five quarters corresponds with five quarters of flat-to-slightly-negative growth in the total U.S. production of plastics products and about five quarters of a downward trend in the capacity utilization rate for the plastics industry. Now nothing is ever 100 percent certain, but it is highly likely that if we are going to get a pick up in the plastics industry, then it will correlate with stronger macro-economic data.

You might be tempted to think that my forecast for real GDP for 2016 is still too optimistic given the lackluster performance in the overall data in the first half of the year. But a closer look at the details indicates that the gains in the data during the second half of this year should accelerate. The changes over the next two quarters will not be anything dramatic, but they will be enough to push the data up close to the longer-term trend.

Data on total consumer spending accounts for about two-thirds of the GDP total in the U.S., and about two-thirds of all consumer spending is spent on services. The other one-third is spent on goods — both durables and nondurables. The trends in the amounts consumers spend on goods are the most relevant for plastics processors. The durable goods data is important for processors who supply the auto, appliance and electronics industries, while spending on non-durables like food and health care products is what drives demand for many types of plastics packaging products.

In the second quarter, consumer spending for durable goods surged by 8.4 percent (at a seasonally-adjusted annualized rate) over the previous quarter while spending for non-durables escalated 6 percent. The increase in spending for services was not quite as robust, but it still posted a solid gain of 3 percent. So clearly, consumers were doing their part to power the economy forward at a pace in excess of 3 percent.

But the strong gains in personal consumption expenditures in the second quarter were partially offset by larger-than-expected declines in both private investment and government spending. Total private investment, which includes things like inventories, residential construction, and non-residential structures and equipment, dropped at an annualized rate of almost 10 percent in the second quarter.

It is unusual for there to be such a large divergence in the trends for consumer spending and private investment, but that is one of the frustrating characteristics of this recovery. We just can't seem to get all of the components of the economy growing at the same time. For the past couple of years, construction has been strong, but manufacturing was sluggish. Before that, manufacturing was pretty good, but government spending was getting cut.

For the last seven years, we have managed to generate total economic growth of about 2 percent, but we can't get it cranked up any higher. The good news is that since we haven't really been able to go too fast, we have stayed at a growth rate that is sustainable and we have averted any danger of overheating and then falling into a recession.

And so here we are in the middle of 2016 with consumers opening up their pocketbooks, but businesses are pulling back. What should we expect going forward?

The U.S. is a consumption-based economy, so the most important part of the outlook for both the overall economy and also demand for plastics products is the forecast for consumer spending. I have charted the 12 month, rolling growth rate for consumer spending on durable goods and non-durable goods, and I have plotted this along with the growth in real disposable personal income. Keep in mind this chart measures the rate of growth — not the actual spending levels — and the slope of the line is an indication of the momentum in the data.

What this chart shows me is that spending for durable goods has lost momentum over the past year or so, but the pace of growth has remained at a strong level in excess of 5 percent per year. The strong growth from spending on autos will likely moderate in the coming months, but this will be partially picked up by increased spending for appliances, electronics and medical equipment.

The growth in spending for non-durable goods is steady at well above 2 percent. The slower, but steady growth represented by this line is probably very close to what a graph of the plastics packaging data would look like. It is not spectacular, but it is reliable and predictable.

The most important trend for my outlook at this moment is the mostly-steady growth in disposable income at a level that is solid. History shows that sustained income growth in the range of 3 to 4 percent is sufficient to generate growth of at least 3 percent in consumer spending. Income growth has exceeded 3.5 percent for the past year and half, and consumer spending growth will respond by drifting higher in the second half of this year. This should be sufficient to push demand for plastics products higher and keep business investment from declining much further.