The Federal Reserve Board recently released the annual revisions to its indexes of industrial production and capacity utilization. Regular readers of this column know I rely heavily on these monthly data sets to analyze and forecast trends in the plastics industry and also its major end markets. So I pay close attention to any changes.
Most years, the revisions are so minor they do not warrant much of an adjustment in my thinking. This year is different for two reasons. First, the revisions on net were negative for total industrial production in the United States. For the 2015-2017 period, the current data show rates of change that are 0.4 to 0.7 percentage points lower in each year than were originally reported.
This means that total U.S. industrial production levels actually declined in 2015 and 2016 before turning positive again in 2017. This is a mild surprise to me. I knew the growth rates slowed, but I did not think they were negative and that the U.S. industrial sector was in a prolonged period of contraction in those years.
This change set me up for a second and even bigger surprise when I compared it to the changes in the data from the plastics industry. According to the revisions, the rates of change for U.S. output of plastics products in the past few years were stronger than were originally reported. And not just a little stronger, but by one to 2 full percentage points stronger each of the past three years.
As the chart now indicates, the output levels for the U.S. plastics industry climbed steadily higher for the past four years. In light of this new data, I have lowered my forecast for the rate of growth for the plastics industry in 2018 to 3 percent (previously 3.5 percent).
Now make sure you follow my logic here. The moderately slower pace of growth that I now expect for 2018 comes off a much stronger base in 2017. Thus, the actual output level for plastics products by the end of the year is a bit higher than it was in my original forecast.
This may not sound like much of an adjustment, but it means that the rate of growth does not need to accelerate to hit my target, it just needs to stay consistent. I am much more comfortable with long-term growth that is consistent and reliable than I am with volatility. I can find plenty of opportunities for an adrenaline rush somewhere else. When it comes to long-term business plans and industry forecasts, I will take reliable and steady every time.
By the way, next month marks the ninth anniversary of the end of the Great Recession for the plastics industry. The low point was hit in May 2009, and it would take several more quarters of rising output before any of us actually felt that the recession was over. If we can sustain average annual growth of 3 percent per year, then the output levels of plastics products in the United States will get back to the all-time, pre-recession highs (which were hit in March 2006) in the first quarter of 2020.
The data measuring capacity utilization rates for the plastics industry also have been shifted upward for this time period. All of this means that the plastics industry was performing at a significantly higher level than was originally reflected in the best and most reliable data that was available at the time. This data is not only of interest to plastics processors, but also to the machinery and materials manufacturers that supply them. These revisions to the production and capacity utilization data for processors go a long way toward improving my understanding of the recent trends in all sectors of the plastics industry.
I will admit that revisions to historical data are backward looking and it is hard to get too excited about something that you cannot do anything about anyway. But historical data are a useful tool for understanding what is happening in the market right now. And a better understanding of the market dynamics in the present moment improves the chances of successfully anticipating what will happen in the future. To be successful in business, you don't need a perfect prediction of what will happen in 10 years or five years or even one year. You just need to improve your odds of understanding what will happen in the next quarter.