It has now been over a month since the election that made fools out of most anybody foolish enough to make predictions about, of all things, the future. I must confess I did not expect Trump to win. So maybe there are some defects in my crystal ball.
But even those intrepid souls who did make a public prediction that Trump would win the election did not predict what would happen in the days and weeks that immediately followed the election.
To say the past few weeks have been full of surprises would be an understatement. But if I am honest, I am compelled to say most of the surprises so far have been pleasant ones. Maybe it's the holiday spirit, or maybe it's a sense of relief after a long, contentious campaign, but whatever the reason, I find myself buoyed by an infusion of optimism about the prospects for the U.S. economy and the plastics industry in 2017. And if the stock market and consumer confidence data are truly indicators of how such optimism is affecting the economy (and they are), then we all have some good reasons to be optimistic.
In short, I expect that 2017 will be a good year for markets that are traditionally cyclical. These categories include most companies that trade in energy products, materials and industrial products. Demand for many types of consumer goods, both durable and non-durable, will also experience stronger growth. And the companies in these markets that are expected to fare the best of all are the small- to medium-sized companies that focus on domestic consumers. There are a lot of processors, compounders, mold makers and equipment suppliers that fall into these categories.
My guess is that there are many business owners and managers who plan to take a “wait-and-see” approach. After all, neither Trump nor the newly-elected Republican-controlled Congress has done anything yet. The only thing they have really had a chance to do is talk about all of the pro-business and pro-economic growth ideas they have. So you may think it that it is prudent to proceed more cautiously. After all, it is one thing to campaign and quite another thing to govern.
But I am excited because the U.S. economy was improving significantly before the election was held. The burgeoning momentum that was emerging in the data was sufficient to power the economy toward faster growth regardless of who won the election. Most of the data upon which I am basing my improved outlook are from the third quarter. This data was reported after the election, so it might have become erroneously associated with the Trump victory. But most of this data reflects activity up through October, and like I said, few people in October were expecting the election outcome we ultimately got.
If you look at the accompanying charts, you will see that both the capacity utilization rate for processors and the pace of growth in their production levels started to head downward in 2015, and this trend prevailed through 2016. This gradual leak in the data affected some sectors of the plastics industry more than others, but few would argue that the recovery phase we had experienced since the Great Recession ended was starting to feel a bit stale. Nobody was really saying we had entered another recession phase, but the suggestions that we were heading in that direction were becoming more noticeable. But a close inspection of these charts reveals that the downward trend that started last year was starting to flatten out in the third quarter of this year.
The slow decline in the industrial sector data notwithstanding, there were some fundamental economic indicators that did not decline in 2016. These were the data measuring household incomes and employment. There were a lot of new jobs created in 2016, and the evidence is finally showing that the tightening labor market is starting to push wages higher. In other words, an increasing number of consumers are starting to earn more money. Because the plastics industry is so heavily dependent on consumer spending activity, this is an environment that portends further growth in the plastics sector, not a recession.
If this forecast holds, then the cyclical low-points on my charts will occur at the end of 2016, and a trend upward in both of these graphs will be clearly established in 2017. The previous cyclical low points in these charts occurred in 2009, but cyclical lows do not always have to occur during times that are officially-proclaimed as economic recessions. I believe that a cyclical low-point in the rate of change curve is being established right now, and the graph will soon start to rise.
One might argue that the labor market has been improving for several years now, and all it has produced is a prolonged trend of real GDP growth of just 2 percent per year. So why do I expect that the growth rates for the economy and the plastics industry will accelerate in 2017? Why not forecast another year of 2 percent growth?
There are two reasons for my improved outlook, and only one of them is based Trumponomics. The other is that I believe the improvement in the labor market has hit what economists call an inflection point. There are strong positive tendencies in the data measuring jobs and wages and spending, but the relationship is not always linear. Just because one goes up, it does not mean that the others will go up at the same time by the same amount. That might describe what we have seen in the recent past, but I believe now this relationship will get back into a more typical state of equilibrium.
Americans were unusually cautious after the financial and housing markets melted down in 2009. The ensuing combination of a collective lack of confidence, subdued capital investment and increased regulations has restrained the pace of growth during the present recovery. There is historical evidence to suggest that it takes an economy as long as 10 years to recover fully from a market collapse like the one we suffered. It will be tempting to point to the recent election as the reason we are growing faster, but I believe it would have happened anyway. We are now mentally and fundamentally ready to shift to a higher gear. This means the economy will soon accelerate to a growth rate of greater than 3 percent.
If Trump and the Republicans in Congress enact even a portion of the reforms they are suggesting, it will be like stepping on the accelerator of an economy that is already moving at a decent pace. Americans were already showing signs of improved vigor. But you do not have to take my word for it. If the U.S. economy is ready to perk up, then it will be evident in the retail sales data this holiday season, and it will be evident in management surveys about plans for the coming year.