Holiday spending could point to good economic signs

As a lifetime student of the American economy, I have developed a grudging appreciation for the holiday season over the years. Now don't get me wrong, I still believe fervently that far too much of our nation's time and income are gratuitously allocated toward non-productive or, worse yet, counter-productive goods and services all in the name of holiday cheer.

But I must admit that the trend in retail sales and consumer spending data in the fourth quarter can be a useful indicator of what we can expect from consumers in the New Year. There is typically a seasonal decline in nominal spending for many types of goods in the first quarter, but that does not always mean the economy is losing momentum. It just means it is necessary to make an appropriate seasonal adjustment to the data to gauge the underlying trend.

The Bureau of Economic Analysis has been struggling in recent years to figure out what an appropriate seasonal adjustment should be in the first quarter of the year; nevertheless, there are times when a strong performance in the fourth-quarter data is a good sign that the growing momentum will carry over into the first-quarter data and beyond.

I believe this will be the case as 2017 comes to an end and 2018 gets started. And the good news is that this acceleration in the growth rate in consumer spending will also soon be evident in the trends in the data for the plastics industry.

The early consumer data based on spending from Black Friday and Cyber Monday indicate that Americans are increasing the amount they spend this holiday season when compared with last year, and the rate of increase is accelerating moderately. The early estimates indicate that a year-over-year gain in the range of 4 percent is likely in 2017 when compared with last year.

This is about a half of a percentage point higher than the average annual increase since the recession ended, and it is also about half a percentage point higher than the annual gain for the past two years. So if you are like me and are feeling about half a percentage point more joyful in 2017 than you did last year at this time, now you know why.

My enthusiasm about the prospects for the domestic plastics industry in the coming year are not solely based on the latest retail sales data. I am also feeling jolly about the recent trends in a couple of my favorite data series — the Federal Reserve's index of industrial production of plastics products and its index of industrial production of consumer goods that excludes high-tech products, motor vehicles and parts, and energy products.

This particular consumer goods series includes large categories such as food, clothing, paper products and household and personal chemical products. It also includes many categories of smaller products such as housewares, sporting goods and toys. Obviously, many of these basic consumer goods sectors are important end markets for plastics products.

As the chart illustrates, the trends in these two series have been closely related in the past. Both started the new millennium in a modest recession but then trended higher for a few years. Keep in mind that these indices have 2012 as their base year, and in the years leading up to the Great Recession, the data for both series were above the 110-line and trending higher.

Both series exhibited precipitous declines during the past recession. The drop in the plastics products graph was more severe because this series includes plastic parts for the motor vehicle industry and building products for the residential construction sector. These two sectors were hit hard and so was the plastics industry. These sectors are not included in this consumer goods data, and as a result, the correlation between these two graphs diminished in the recession.

It is disappointing to me that the gap in these charts that opened during the recession has persisted thus far through their respective recoveries. One thing they have in common is that, as of 2017, neither of these charts has fully recovered from the Great Recession nine years ago.

The plastics sector has made steady progress, and it looks like it is in range of a full recovery in the next year or two. From peak to trough, the plastics products graph plummeted 37 index points (30 percent) in the recession but as of the latest month has recovered 25 of them.

The consumer goods series has not been nearly so resilient. This series fell 18 index points (15 percent) when measured from the same peak to the same trough as the plastics chart, but as of the latest month it has recovered only two of these points.

To put it another way, the U.S. economy has been in a steady recovery mode for the past eight years, and during that time the population of this country has also increased by about 6 percent. But the volume of everyday consumer products manufactured in this country during that time has stayed mostly unchanged since the bottom of the recession.

Therefore, it heartens me to report that the trend in recent months in both series has accelerated upward. The latest data for the consumer goods series is at its highest level in nine years, and for the past couple of months, it increased at an annual rate of almost 3 percent.

The forecast for all of 2018 calls for this series to continue to expand at a rate of just under 3 percent per year. This will follow a rise of just under 1 percent in 2017. At this pace, it will still take several more years for this series to return to its pre-recession levels, but it finally feels like a recovery has started.

Partly because of expectations of stronger retail sales and consumer spending in the coming year and partly because of an acceleration in the overall production of consumer goods, the forecast for total U.S. output of plastics products also calls for a gain of 3 percent in 2018. This pace of growth will get us back to the long-term trend that has prevailed since the recession ended, and it will improve on the subpar rise of 1.5 percent in 2017.