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August 28, 2018 02:00 AM

Back-to-school, holiday spending to give early look into 2019

Bill Wood
Economics Editor
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    The next few months represent the two most important seasons of the year for many plastics processors, their customers and suppliers: back-to-school and the holidays.

    These two seasons not only play a large part in determining how well the economy will do in 2018, but they also provide the first insight into what kind of growth we can expect for 2019. If you are like me, you will spend less time reflecting and more time forecasting in the coming months.

    The good news is that as we enter this critical part of the year, the state of the American consumer is strong. When compared with last year, households have more money at their disposal and they are spending a good portion of this extra income. A combination of stronger wage growth and tax cuts will push the growth rate in real disposable income up to 3 percent this year. This is a significant improvement when compared with the gain of 2.6 percent last year.

    Some of this gain in income is going into savings or to pay off debt. Recent generations of Americans do not enjoy a reputation as good savers; nevertheless, the savings rate will post a modest gain to about 7 percent this year. A rising savings rate and lower debt levels — economists refer to this as stronger household balance sheets — are crucial trends for a healthy, long-term outlook because they significantly lower the probabilities of a prolonged and severe economic recession in the future.

    This uptick in frugality notwithstanding, much of the rise in incomes is getting spent now. Total retail sales, excluding motor vehicles, in the U.S. are expanding at their fastest rate in the past six years. My latest forecast for retail sales, excluding autos, calls for a gain of 5.7 percent this year. By comparison, overall retail sales expanded 4.5 percent in 2017.

    Taking a closer look at the data, the strongest growth this year by far is in online sales. This category is expanding at a pace of 10 percent this year. Most people think of Amazon when they think of shopping online, but Walmart and Target are also having monster years in 2018. And both these companies have invested heavily in their online activities. The managers may take all the credit, but the fact that all three of these companies are reporting such tremendous earnings growth this year says a lot more to me about the activity levels of the American consumer.

    Online shopping continues to evolve at a rapid pace, and this will affect the way many types of consumer products are marketed, packaged and delivered in the coming months and beyond. In a bygone era, packaging for consumer products was designed with a heavy emphasis on shelf appeal. But shelf appeal may become less of a factor if large amounts of these products are handled by robots before being shipped directly to consumers from warehouses.

    Walmart and Target are also introducing delivery services from local stores as well as options for customers to order online and then pick up the items themselves. These services are designed to eliminate the need for the customers to push a cart through the store and then wait in a checkout line. I am no expert in packaging design, but here again, I would not be surprised if an expansion of these two services changes the way consumer products are packaged.

    Some of the other types of retail establishments that are enjoying above-average years — growth of 5 percent or better — so far in 2018 include: home furnishings stores, clothing stores and the miscellaneous category, which includes pet stores, office supplies and gift shops. I point these establishments out because they sell some of the everyday products that are essential but not always exciting. They are consumer staples, and a large percentage of them are made with plastic.

    The rising growth in the retail sales of these types of goods is also emerging in the data measuring the volume of U.S. output of these products. As the graph shows, industrial production of consumer products — excluding high-tech, motor vehicles and parts, and energy products — is also accelerating. On the current trajectory, this category in 2018 will enjoy its fastest pace of annual growth since 2006. The current forecast is for a gain of 2 percent in 2018, a strong rise from the 0.3 percent increase in 2017.

    It is still a little too early for me to offer any official forecasts for 2019, but there are a couple of trends that will likely emerge. First, the bump in growth the economy receives from the tax cuts this year will fade next year. Americans will still pay less tax, but the year-over-year comparisons for the government data and corporate earnings will not get the same pop in 2019 that they are getting in 2018.

    Second, the gains in the employment data will be less robust. The total number of employed Americans will be higher, but as we get closer to full employment, the size of the monthly increases will diminish.

    If I am right about these two trends, then the state of the American consumer will continue to be strong in 2019, stronger even than it is this year. But the rates of growth in many of the macroeconomic indicators will be a bit lower.

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