There are still a couple of weeks left in the second quarter, but the data that has come in so far for April and May indicates that overall U.S. economic activity accelerated in the second quarter. You will recall that real GDP expanded at an annual rate of just under 2.2 percent in the first quarter, and the early estimates for the second quarter are calling for an annual rate closer to 3.5 percent.
There is also strong evidence that the U.S. manufacturing sector is a major beneficiary of this accelerating growth. The ISM Manufacturing Index was 58.7 for May, which was 1.4 points higher than the April reading, and this figure is well above the expansionary threshold of 50. The stronger ISM report is corroborated by the Fed's industrial production index for manufacturing in April, which was up a solid 0.5 percent from the previous month.
When the improvement in these indicators is combined with the strong gains in the number of manufacturing jobs added in both April and May, the only logical conclusion is that business conditions in the U.S. manufacturing sector are healthy and improving at a gradually accelerated pace.
What does that mean for the plastics industry? I am happy to report that, at this moment, I have little doubt that most plastics processors and their suppliers are enjoying strong demand for their products. Taxes are lower, wages are rising, and consumer spending is increasing. I cannot think of better underlying economic fundamentals than we have right now for supporting an upward trend in aggregate demand for all types of plastics products.
Yet despite these strong fundamentals, there are a couple of indicators for plastics that have persistently underperformed throughout this entire recovery cycle: One is the index measuring U.S. production of plastics resins and the other is an index measuring U.S. production of consumer goods, excluding high-tech products, motor vehicles and parts, and energy products.
This latter category is composed of of an array of plastics end markets such as housewares, sporting goods and toys. I cannot help but think of this category when I go into stores like Walmart, Bed Bath & Beyond or Dick's Sporting Goods. By now we all know it is almost futile to search for domestically produced merchandise in these stores, but I still get nostalgic about this particular data series nonetheless.
As the accompanying chart indicates, both of these indices were performing pretty well before the Great Recession hit in 2008. And then both dropped precipitously. The index for plastics resins dropped substantially further than the consumer goods index, but it rebounded in the two years immediately after the recession and regained some of the decline. You will note that the output of consumer goods did not rebound at all after the recession.
It is perplexing to me that both of these indices were basically flat from 2011-2017. Both the overall U.S. economy and the U.S. output of plastics products expanded at average annual rates of 2 percent per year throughout this time period, but the production levels of plastics resins and basic consumer goods were flat to down for this entire seven-year stretch. That is what I mean by underperforming.
The data on resin production exhibited more volatility than the consumer goods data did, and there was a large drop and subsequent rise in the resin data last year due to the effects of Hurricane Harvey. But for most of this decade, these indices have hovered right around the 100-line, and the average rate of growth for both series during the past seven years is right at zero.
Clearly, there are structural reasons for why this data has not really experienced any expansion in recent years. But you would think that after nine years of economic expansion they might exhibit some growth.
The good news is that both of these indicators are registering growth so far in 2018. It is not obvious, but if you look closely at the trends in both these series for the past few months, you can see that the slope is upward. Output of basic consumer goods is up to its highest level in nine years, and it is growing at an annual rate of 2 percent so far this year. Production of resins recently hit its highest level in over four years, and it is currently growing at a modest but still positive annual pace of about 1 percent.
Modest growth rates and lackluster industry sectors are never going to grab the headlines, but when lagging indicators such as these finally start to improve steadily, we can accurately proclaim that the plastics industry is "hitting on all cylinders."