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November 15, 2016 01:00 AM

Clearing sky on the horizon for plastics packaging

Bill Wood
Economics Editor
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    Jessica Jordan
    Bill Wood

    For many manufacturers of plastics packaging products, the past few years have been a grind. It just seems like market demand has yet to recover fully from the last recession. So while the overall U.S. economy has officially been in a recovery period for over seven years, the packaging sector is stuck in a slow-growth mode.

    But business conditions for processors of packaging products should be noticeably better in 2017. My forecast for next year calls for market demand for plastics packaging products to accelerate moderately. We will not get back to the pre-recession levels of growth, but the pace of expansion will be a bit stronger than it has been for the past few years. The forecast is based on expectations for a gradual, but steady, acceleration in consumer spending on nondurable goods.

    This acceleration in spending for consumer nondurables will be a welcome change from the pattern of the past few years. The graph noted on this page is a chart of the U.S. industrial production index for nondurable nonenergy consumer goods that is compiled and reported each month by the Federal Reserve Board. Since this is a category that includes the largest end-markets for plastics packaging products, it is an excellent indicator of the trend in market demand for these products. If they are making more of these kinds of consumer goods, then they will need more packages to put them in.

    There are two things that are immediately obvious from this chart:

    • There was a sharp decline in the domestic output of these products during the last recession.

    • And the overall level of output for these goods has been flat-to-down ever since.

    Now I know that market conditions have not been robust, but the trend in this chart is incongruous with what I would have expected. Economic growth has been sluggish during the past seven years, but it has been positive due mostly to slow, steady gains in consumer spending. And these goods represent consumer staples. They are not big-ticket, durable goods that cost a lot of money. They are mostly every day, household products that should exhibit a long-term rise in production levels.

    I dug down into the data and picked out a few of the categories that should be of interest to plastics processors. These categories are represented on the accompanying table. I left out a few categories such as tobacco, leather and paper products because they did not seem pertinent to the plastics industry (but if you are interested, the data from these categories are in a strong downtrend).

    The news here is only a little better. The crucial end markets of food and beverages are slowly growing, but I was surprised by the slow declines for medicines, toiletries, and household chemicals. After seeing this data, the recent trends and anecdotes from the packaging sector are easier to understand.

    With a clearer picture of what is happening right now, I turn to the forecast. It is quite likely that some of the decline in the output levels of consumer nondurables is due to factors such as offshoring or the rise in the value of the dollar, but the most important variable is the trend in domestic demand. And the most important factor in consumer demand is wage growth.

    By now everybody knows that the trend in the employment data has been strong for several years, but the trend in wages has been slow to follow. So the data on consumer spending has benefitted from the fact that more people have jobs, but we still need to get to the next level which will happen when the people with jobs are making more money. There is mounting evidence that this is at long last starting to happen.

    There are a couple of factors at work here. For instance, several states have passed legislation that raises the minimum wage, and this trend is expected to continue. Large companies like Wal-Mart Stores Inc. are initiating their own programs to raise workers' wages, and there is even a possibility that it will become federal law. Another factor is that presently-employed workers are becoming more confident about seeking out jobs that pay more. Many manufacturers have bemoaned the fact that they are having trouble finding skilled workers to fill positions. This puts upward pressure on the wages of the skilled workers that they do have.

    So the labor market is tightening and wage growth is accelerating. This means that income levels will be strong enough to support faster growth in overall consumer spending. One other factor that will play a positive role is that as consumer debt burdens, as a percentage of their disposable incomes, are at historic lows. The past seven years of belt tightening, combined with historically low interest rates, have put households in a very strong position to spend more just as soon as they are inclined to do so.

    As stated above, my forecast calls for this to start in 2017, but I will admit that it is impossible to say with certainty that this will happen. However, we will not have long to wait to see if I am on the right track. A good indication of an increase in consumer spending for all kinds of goods, both durable and nondurable, will be evident in the data from retail sales during the holidays.

    A strong holiday season will bode well for the plastics packaging sector in 2017. Many retailers feel the same way and they are already announcing plans to hire a large number of seasonal workers, and they plan to keep many of these workers on after the holidays.

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