As an analyst of the manufacturing sector, I rely heavily on the monthly industrial production data that is compiled and reported by the Federal Reserve Board. This data is not only an important source of information about the activity levels of U.S. manufacturers, it is crucial for policymakers all the way up to the Federal Reserve Chairwoman Janet Yellen and also the U.S. Congress.
So there is always a sense of apprehension for me when it comes time for the major revisions to these historical statistics. That's because I spend a lot of time analyzing the historical trends in this data in an effort to produce reasonable forecasts for the plastics industry and the major end markets for plastics products. Usually, the revisions are not very big, so their effects on my forecasts are negligible.
But every now and then, the revisions are a little more substantial. When that happens, I not only have to update the database, redo the forecasts and significantly change my outlook, but I then have to explain to my readers why I didn't get it right in the first place. Statistical analysis is fraught with enough pitfalls as it is, and the chances of generating a useful forecast using historical data are greatly diminished if the original data ultimately turns out to need significant revisions.
With that disclaimer, it is now my duty to report that I have lowered my forecast for the total U.S. output of plastics products in 2016. A few months ago my interpretation of the recent trend in the data that measures production of plastics products was that overall production levels had hit a plateau, and that production activity would start trending gradually upward later this year. That was also my interpretation of the data that measures the capacity utilization rate for plastics processors in the U.S. — that it was trending sideways and that it would start to rise again in the second half of 2016.
I still believe that these data will gradually improve through the end of this year, but the recent revisions to the data indicate that the industry did not hit a plateau as I originally thought. But rather, it had been in a downtrend for the past year. This decline in the output of plastics products was not very big, but it was significant enough to put a damper on things like hiring and capital spending plans for many processors. This decline corresponded with a drop in the data that measures most other segments of the manufacturing sector.
For the record, my new forecast for 2016 calls for no change in the total volume of plastics products produced in the U.S. when compared with 2015. Another way to say this is that the annual growth rate for this year will be 0 percent. This follows an annual gain of 2.9 percent in 2015.
In terms of capacity utilization, the Fed's statistics put the annual average for the entire plastics industry at a little over 80 percent in 2015. This year, the average for all processors combined will be closer to 78 percent. It is important to note here that average capacity utilization rates within the industry vary widely depending on the type of process (for instance, injection molders tend to run at much lower capacity utilization rates than extruders), but I have found that the Fed's data is a reliable indicator of the direction of the prevailing trend for most processors.