Durable goods numbers point to continued growth for plastics

A​ couple of weeks ago, I wrote that U.S. manufacturers are reporting strong employment growth so far this year, with most coming from the durable goods sector. Some durable goods segments are huge end markets for plastics products (automobiles, for example), while others are not (fabricated metal products). Thus, not all durable goods trends are the same when it comes to their impact on plastics.

By definition, durable goods are products that have a lifespan of at least three years. They tend to be expensive to make and buy, and they are often purchased on credit. As a result, the changes in the data on durable goods are more volatile than for most nondurable goods categories like food, packaging and gasoline. That means market demand for these products grows faster when the economic fundamentals are strong, and it contracts faster when the overall economy stumbles.

Rising employment levels, wages and corporate profits support strong growth in the demand for durable goods, while increases in interest rates and the value of the dollar tend to inhibit demand increases. For all these reasons, the strongest growth in the data for most durable goods usually occurs later in the business cycle.

While I believe that the current expansion will not end for another year or two, we are certainly in its later stages.

Nevertheless, the prevailing economic conditions in the U.S. are a mixed bag for manufacturers of durable goods as well as the plastics processors that supply many of these industries. We are presently enjoying a gradual rise in the employment and wage data, and corporate profit levels have been robust in recent quarters. But we are also in the midst of an upward trend in interest rates and this trend has started to push the value of the dollar higher in the past few weeks.

To understand how recent trends might impact future demand for plastics products and machinery, I took a deep dive into the extensive dataset compiled and reported by the U.S. Census Bureau pertaining to manufacturers' shipments, inventories and orders. From this data, I picked out a few industries worthy of note.

New orders for U.S. manufactured goods are up 8 percent so far in 2018 when compared with the same period last year. This is much higher than the long-term average rate of growth in the manufacturing data, and it is a sharp acceleration from the very respectable gain of 5.7 percent in 2017.

This large gain is being powered by the 9.4 percent jump in demand for durable goods this year. This is the fastest pace of growth in six years, and again, it is well above the long-term average.

Now you will never hear me complain about strong gains in the data for any U.S. manufacturers. But if you separate out the sectors that are driving this rapid expansion, you will see they are not the most important markets for most plastics processors.

The table is organized from fastest to slowest in terms of gains so far in 2018. It is not until you get down to the construction materials category, up a solid 5.4 percent, that I start to think the trends will have a significant impact on my outlook for plastics. I am pleasantly surprised by the 5.1 percent increase in new orders of motor vehicles and parts. Based on the recent trends in the motor vehicle sales data, I would have expected a modest decline. This pleasant surprise is partially offset by a mild disappointment in the decline in new orders of appliances. I had expected a modest increase.

If I step back and look at this data, there are two industry segments that are driving the strong gains in demand for durable goods this year. The obvious one is nondefense aircraft. Passenger jets are what comes to mind for most people when they think of this category, and the airline industry has experienced a surge in demand over the past few years. This category is also getting a boost from the steady rise in cargo miles flown each year. Both of these trends will continue for the foreseeable future, so if you are a processor that can take advantage of these markets, then you will enjoy a nice tailwind for the next few years.

The other industry that is driving demand for durable goods is the energy sector. Fabricated metal products, metalworking machinery and mining/oil extraction machinery are all categories that grow rapidly when the price of oil rises high enough to crank up activity in the oil patch. Demand for energy products is also helping to boost the growth rate in the nondurable goods data this year. The energy and petrochemical sectors are major suppliers to plastics processors, but not huge end markets.

Based on this fresh look at the data, my outlook for the plastics industry is unchanged. I still expect the total output of plastics products in the U.S. to increase by over 3 percent this year, which is moderately stronger than the gains of the past three years. Many of the major plastics end markets are experiencing solid growth, and I expect this to continue.

The solid gains in other manufacturing sectors will support growth in the plastics industry even if these sectors are not direct consumers of a large amount of plastics product. These industries will create jobs and provide wages for an increasing number of American workers. This will spur growth in aggregate demand in the United States, and household spending is still the dominant force that ultimately drives demand for plastics products.