Now that 2017 is half over, it is an auspicious time to review the economic progress we made in the first two quarters and update my forecasts for the second half of the year.
The longer-term prospects for the U.S. manufacturing sector, particularly the plastics industry, remain positive, but I have lowered some of my short-term forecasts for growth in 2017. Based on the recent performance of the macro-economic indicators and also the annual revisions to the Fed's industrial production indices, I now expect the growth rate in the total U.S. output of plastics products to be somewhere in the range of 1 percent-2 percent for all of 2017.
This would be a moderate rise from the gain of 0.5 percent in 2016, and it represents a continuation of the trend that has persisted for the past year or so. Some might think of this trend of slow growth as boring, but I prefer to think of it as steady and reliable. If uncertainty is a bane to managers, then this trend and the forecast of its continuation should provide some level of comfort.
The best illustrations of this trend are the rate-of-change charts derived from the Fed's monthly index for U.S. production of plastics products and the Census Bureau's monthly data on new orders for durable goods. I make frequent use of 12-month rate-of-change charts because they tend to smooth out all of the noise stemming from seasonality and one-time anomalies in the data.
For my forecasts, I am interested in the underlying momentum in the data that has persisted for a period of at least one year. And that is what these curves measure: each point represents the growth rate that is calculated by adding up all of the data points in the 12 months ending that month and dividing it by the total from the previous 12 months. Rate-of-change charts also make it easier to compare trends in datasets that are reported using different units of measurement. In this case, I am comparing the trend in a monthly index to a trend in a monthly dataset that is reported in dollars.
As you can see, both of these charts have hovered very near the zero-line for over a year. There is a bit of a wrinkle in the durable goods data due to a huge order for aircraft in the middle of 2014, but other than that, these curves indicate a prolonged period of gradual growth over the past few quarters.
And that is the rather uncomplicated basis for my forecast for the remainder of this year. As always, there are some things both known and unknown that could dramatically alter the path we have been on for the past year or two, but at this time they do not appear to me to represent a higher probability of occurring than the status quo.
I am not alone in this assessment of near-term risk to the outlook. The stock market is the best-known and deepest high-frequency gauge of future expectations, and it is currently trading at all-time highs. In addition, the Federal Reserve Board just raised the Fed Funds Rate for the third time in the past six months. The Fed is a cadre of the best-trained economists and analysts who do nothing else but monitor the economy, and they believe that the economy is strong enough to justify a moderate rise in interest rates. Of course both the Fed and the stock market could be wrong, but I cannot see any reason to argue with them at the present time.
The biggest downside risks to this forecast are geopolitical in nature.
Tensions in the Middle East and with North Korea are escalating. There is also rising uncertainty in the United Kingdom stemming from a spate of recent terrorist attacks and the pending Brexit process. But none of these factors has yet to become an impediment to the slow grind upward in the U.S. economy.
There are also upside risks to this forecast. The most notable are the passage of comprehensive tax reform; an increase in infrastructure and defense spending; and the continued rollback of regulations. I will not predict the likelihood of these things happening, but I will predict that they will not have a large effect on the performance of the economy in the next two quarters.
So for plastics managers, market demand based on cyclical factors will improve incrementally in the coming months. Resins prices will likely trend lower, the value of the dollar will likely trend higher and energy prices will be stable. Interest rates will remain near their current low levels, and this will favor capital investment. But the low cost of capital will need to be weighed against slow growth rates in aggregate demand that could result in a slow return on investment.
So as we enter into the second half, I am not too concerned about the risks to this forecast. But I must confess that I am growing worried about the risks stemming from this forecast. It is increasingly apparent that the rate of growth that has prevailed during the eight years of this recovery cycle is not sufficient to quell the political strife in this country.
I am not convinced that faster GDP growth will result in a corresponding rise in median household incomes, but it is worth a try. So the sooner we can implement a long-term, pro-growth strategy, the better. And while we are at it, we must also figure out how to transition our economy and our culture from a consumption-based mindset to one that is more intent on investment and saving. We need more capital formation, and we need a higher level of development in our workforce and citizenry if we are going raise our standard of living and compete successfully in the global economy.