Data points to stronger 2018 for the industry

The U.S. manufacturing sector has entered a phase in which it is gathering speed. Unless something dramatic happens, we will enter 2018 with significantly more momentum than I expected a few months ago, and this has caused me to raise many of my forecasts for 2018.

That assessment comes after the release of the Census Bureau's Report on Manufacturers' Shipments, Inventories and Orders for September 2017. The data in this report confirms the trends in other manufacturing and plastics industry data on which I have reported in previous columns. Specifically, the growth rates for many of the plastics-intensive end markets are gradually accelerating in a positive direction.

According to this report, the dollar value of shipments of manufactured durable goods — this is the sector that includes electronics, appliances and automobiles — escalated 4.9 percent in September when compared with the same month last year. This followed a similar gain of 4.9 percent in August.

When compared with the monthly data from 2016, this category has experienced an increase in shipments every month this year and the pace of growth is accelerating. For the year to date, the shipments of manufactured durable goods are up 3.7 percent when compared with last year, and for the third quarter, the year-over-year growth rate is 4.6 percent. By comparison, the growth rate for total shipments of manufactured durable goods for all of 2016 was a negative 1.6 percent.

The pattern in the shipments data for manufactured nondurable goods — the biggest subset in this category is food products — is even more encouraging. The dollar value of shipments of these goods in September jumped 5.7 percent when compared with the year earlier. This came after a rise of 6 percent in August. The gain for the entire third quarter was 5.8 percent, and for the year to date, the total is up 6.6 percent. And here again this is a sharp contrast to 2016 when the annual growth rate was a negative 2.5 percent.

So let's take a step back and fully appreciate what this data is telling us. At this time last year, the manufacturing sector in general and the plastics industry in particular was going through a soft patch. The durable goods data from month to month was registering as many declines as gains, and the medium-term growth rates were clearly slowing. We did not go through an official recession, but it was certainly a period of consolidation in the manufacturing sector. As I have reported on several occasions, this was clearly evident in the overall data from the plastics industry.

As we entered 2017, the growth rates for many of the manufacturing series were still positive, but overall the growth was slow and the outlook was tenuous at best. Increases in the range of 1 percent or lower were common among many plastics processors, especially in the packaging sector. Optimism was high following the election, and that may have also provided some support to the hard data, but it was not obvious from the prevailing trend that conditions would improve much this year.

Thus, it gives me great pleasure to report that the outlook as we head into 2018 is much better that it was 12 months ago. And this outlook has no basis in post-election euphoria, though I cannot rule out some action — either positive or negative — from Washington, D.C., that could put my forecast at risk.

And as I said above, the closer I look, the more confident I get. As a part of this monthly report and historical dataset, the Census Bureau also releases figures on the inventories-to-shipments ratio and the unfilled orders-to-shipments ratio for some of these categories. It is always useful to check these ratios because if the increase in shipments we have experienced in the past few months is causing a substantial change in either inventories or unfilled orders (backlogs), then these changes could certainly affect our outlook.

The inventories data reveal that inventory levels for both durable goods and nondurable goods are increasing, but the ratios of inventories-to-shipments for both categories are trending downward. This means that inventories are rising at a slower pace than shipments are, but not significantly slower. Everybody is moving more products, yet there are no major bottlenecks or shortages. In other words, all is good at the present time in the world of inventories.

Only the durable goods sectors have data reported for unfilled orders-to-shipments ratios, and once again the trends reflect a healthy dynamic. Backlogs are down moderately from a year ago, but they remain well above historical norms. Based on the data and the prevailing trends, it appears that there is still some slack in the supply chain that is gradually tightening, but overall we are not yet approaching "tight" conditions.

When I put all of these trends from the manufacturing sector together, I derive an outlook in which business conditions and activity levels are steadily improving. As of this moment, there is nothing on the horizon that should cause any abrupt changes in prices or supplies. There is also no evidence of overheating in any of the major sectors. Overheating in the economy or an industry is what typically causes recessions, so the chances of a recession next year appear remote.

I have already made upward adjustments to my forecasts for the plastics industry for 2017, but at this point in the year, the real effect of these improving trends in the manufacturing sector is on my freshly revised forecasts for 2018.

After posting anemic growth of 0.5 percent in 2016, total demand for plastics products is on track to expand by 1.7 percent in 2017 and 3.5 percent in 2018. That is 0.5 percent to 1 percent higher in 2018 than I would have forecasted three months ago.