Wrapping up a solid forecast for packaging

Moderate growth is in the forecast for plastics packaging products.

Market conditions for plastics packaging products will be firm this year, and I expect an incremental gain in overall demand. This does not mean that every segment of the plastics packaging industry will experience an increase. In fact, I expect there will be significant variance in the growth rates amongst some packaging segments, and some segments may very well suffer declines. But for the industry as a whole, 2017 will be another year of moderate growth. It will be comparable to the pace of growth that the industry has averaged for the past few years.

The plastics packaging industry is mature, so the trend in packaging demand is largely driven by changes in overall consumer spending primarily for non-durable goods such as food and personal care products. Innovation will continue to be an important factor in these sectors, but I do not expect the packaging industry to create any category killers or disruptive-technologies — at least not in 2017. This means that competition will be tough and margins will stay tight.

The basis of my outlook is my strong belief of a continuation in the prevailing trends in the overall U.S. economy. Not only is packaging a mature industry, but it is broad in its scope. It touches every household and a wide range of consumer end markets. So to understand my forecast, I need to walk you through the major trends in the macroeconomy.

The most important economic story this year will be the fact that the U.S. finally reaches full employment. Full employment occurs at the point when all of the unemployed and underemployed workers who want full-time work can get it. In other words, there is no more slack in the labor market. We are already at a point where the number of job openings is at a record high, layoffs are low and the number of workers who voluntarily quit their jobs to find a better job (known as the quit rate) is rising. So I expect the economy will reach full employment this year.

But the demand for labor will not stop growing just because everybody already has a job. Full employment means that aggregate demand will also continue to rise. So in order to meet the rising demand for labor at a time of full employment, employers have to offer higher wages. Wage growth is currently growing by about 4 percent on a year-over-year basis, and this rate is accelerating. So more people will have jobs, and those jobs will, on average, pay higher wages. This will result in higher spending.

This trend on its own is enough to keep demand for packaging products strong. But another trend that is also underpinning demand is the rise in household formations. The household is the foundation for consumption in America, but the formation rate took a dip during the recession. We have also experienced a secular shift where young adults have started to get married later and are instead choosing to live at home.

But recent data suggest that the rate of household formations currently exceeds 1.2 million per year. This pace will put upward pressure on the residential construction data in 2017 as well as the data that measures output of consumer goods. And that is how the trend in demand for plastics packaging will also get pushed upward.

So the changes in the data compiled by the Federal Reserve that measure the production levels of non-durable, non-energy consumer goods are excellent indicators of the trends in end-market demand for many types of plastic packaging products. If we look at the aggregate data series — total production of non-durable, non-energy consumer goods, then the reasons for the slow-growth trend that has prevailed in the packaging sector in recent years are illuminated. After expanding by a pedestrian rate of 0.7 percent in 2015, the total U.S. output of these goods unexpectedly declined by 0.6 percent in 2016. It's hard to sell more packaging units if they are making fewer of the products that go inside.

I expect this downtrend to reverse in 2017 and register a modest gain, but the long-term trend in this data since the last recession has been flat-to-down. Americans just have not purchased this stuff in the same quantities as they did prior to the recession. A vibrant labor market combined with a steady rise in household formations will push this data upward in the coming years, but the changes will be gradual for the foreseeable future.

If we break this data down into its component parts, then we see some variation in recent spending patterns. The output of food products accelerated in 2016 after a couple of years of subpar growth. Within the food sector, the growth in the data measuring output of meat products is still the strongest, while the trend in fruit and vegetable preserving and specialty foods production accelerated to a pace that was above the recent trend. The overall dairy data was flat, but within this sector, cheese is stronger while ice cream was weaker than expected. Production of coffee and tea products jumped, while the four-year decline in the production of soft drinks worsened.

Production of pharmaceuticals and medicines continued a downward trend that started during the recession. Output of these products was down 1 percent in 2016, and it is down more than 20 percent from its peak 10 years ago. Another important packaging end -market that peaked 10 years ago and has since been on a downward slide is household chemicals (soaps, cleaning compounds and toilet preparations). U.S. production of these slipped by 1 percent in 2016, and it is down almost 25 percent from the peak in 2007.

One final factor that will affect profitability of packaging manufacturers in the coming year is resin prices, and here the news is positive. As the chart indicates, resin prices are hovering near their cyclical lows at the present time. Based on the recent trends in the oil and natural gas markets, I expect resin prices to rise this year but not by much. So processors' margins are not expected to come under too much pressure. And that's the bottom line.