The capacity utilization rate for plastics and rubber processors in the United States slipped to 75 percent in January from 75.3 percent in December, according to the latest data from the Federal Reserve Board. This marked the fifth consecutive monthly decrease in this data. By comparison, one year ago the utilization rate stood at 79.1 percent.
As the chart shows, the decline in January is a continuation of a longer-term trend that has prevailed for the past two years. The last peak in the capacity utilization rate occurred in late 2014 at 81.6 percent. Clearly this is not the direction we want to go — processors typically make more money when operating rates are high and rising.
So the question now before us is, “When does this trend reverse and start to head back up?”
Before I go into the particulars about what this two-year decline means for the outlook for our industry in 2017 and beyond, it is useful to look at the trend in the Fed's corresponding data on monthly output for the plastics industry. These two data series are closely connected, and when analyzed together they provide insight about trends in investment, pricing and profit levels.
As the chart for industrial production of plastics products illustrates, the plastics industry enjoyed a six-year trend of steady improvement after it rebounded off of a major cyclical bottom in the first half of 2009. This string of six straight years of annual increases in total output ended last year when the overall production for the industry declined by a modest 0.6 percent.
These data also exhibit an interesting stair-step pattern in which periods of above average growth rates are interspersed with periods of flat growth. The average annual rate of growth during the period from 2010 through 2015 was almost 4 percent per year. There was one year in which the pace of growth accelerated to 8.3 percent, but that was followed the next year by a gain of only 0.3 percent. Overall, the plastics industry had it pretty good — we were growing by 4 percent per year while the whole U.S. economy was expanding at an average rate of right about 2 percent. During this time, the plastics industry was one of the fastest-growing segments of the entire manufacturing sector.
A comparison of these two charts shows that for the first six years after the data hit bottom in early-2009, the steady increase in the output of plastics products was matched by a rise in the capacity utilization rate. The trend in the capacity utilization also exhibits a stair-step pattern, so the relationship between these two data series was consistent.
But then starting in the second half of 2015, the close relationship between these two indicators became unhitched. Over the next five quarters, output levels were mostly flat while the utilization rate data steadily declined.
This divergence was due to the rising levels of capital investment in this industry since the recovery started. Expenditures on both new equipment and employees plummeted during the Great Recession, but as the plastics industry and the overall economy began to recover, so did investment in new machinery. The rate of investment in new equipment really perked up as the utilization rate got close to the 80 percent level.