Consumer spending trends look up for processors

The holiday shopping season is in full swing, and we are already getting a flurry of data and news reports about how much Americans are spending this year. From a retailer's perspective, this is the biggest quarter of the year for consumer spending and retail sales, and the early returns indicate a solid increase of 4-5 percent when compared with the same quarter a year ago.

This is welcome news for most retailers as well as plastics processors and other manufacturers because inventories of most products will get cleared out without the need for heavy discounting. There will always be a few stories of products that either sold out more quickly than expected or languished on store shelves, but I expect that overall profit margins this quarter for the retail sector will be healthy.

But whether you and your customers made money at the end of this year or not, it is now time to start planning for 2019. The gain in consumer spending this quarter is a good indication of a vibrant consumer sector heading into next year, but it is always prudent to assess the probable trajectories of the relevant trends in the macroeconomic data and identify any one-time factors that could affect your plans.

One notable example of a one-time factor next year is that tax refunds are expected to hit an all-time high in the first half of 2019. This will result in a sharp rise in demand for many types of products in the first two quarters. This surge will pull demand for many goods and services forward, which means there will be a noticeable deceleration in demand for these same goods and services in the third quarter.

It turns out that most American households have more taxes taken out of their paychecks than is required in anticipation of a refund the following year. Many workers view this as a forced savings program that results in a pleasant windfall in the coming spring. When there are substantial changes to the tax laws like the reduction in tax rates we had this year, research suggests these workers do not fully adjust their rates of withholding downward.

This means there is even more soon-to-be-refunded money being withheld than ever before. Estimates suggest total tax refunds in 2019 will exceed last year's total of $235 billion by as much as 25 percent, which works out to about $60 billion of extra windfall this year.

According to data from the U.S. Treasury Department, the timing of tax refunds spikes sharply in late February and then gradually tapers through the middle of April. It should come as no surprise that taxpayers due a refund tend to get their returns filed as early as possible while those who wind up owing additional tax will wait as long as possible to file.

The National Retail Federation conducted a survey in 2018 in an effort to determine where Americans planned to spend their tax refunds. Their research indicates the majority of these refunds go to savings accounts or to pay down debt, but a substantial amount is spent on vacations, dining out, clothes, home improvements and large durable goods purchases such as electronics, automobiles and appliances.

If you are a processor that supplies any of these end markets, then you will want to be aware of this one-time spurt in the seasonal demand generated by the tax-refund cycle. Personally, I am very interested in finding out whether the overall increase in tax refunds is as large as 25 percent, and whether there is a corresponding increase of 25 percent in spending for home improvements or large durable goods as these are large end markets for plastics products.

On the positive side, if these projections hold true, it means there should be a nice bump in the plastics industry data in the first half of next year. On the negative side, this will pull demand forward, and the plastics data from the third quarter of next year will experience a noticeable deceleration.

The chart illustrates my current projection for inflation-adjusted Personal Consumption Expenditures (PCE) on a quarterly basis through next year. You should note that while I expect the growth rate in overall consumer spending to decelerate below the long-term trend level in the second half of next year, I still expect it to remain positive. Consumer spending accounts for as much as 70 percent of the total U.S. GDP, so as long as the PCE data posts positive growth at a rate that is close to the long-term trend, I do not expect there to be an overall recession in the U.S. economy.

For the foreseeable future, the uptrend in consumer spending will be supported by historically low levels of unemployment and steadily rising wages. These trends will push growth in inflation-adjusted wages to 4 percent by 2020. And continued expansion in the consumer spending data is the most important factor to the outlook for many of the other macroeconomic trends in the coming year.

Some sectors of the overall economy and certain segments of the plastics products and plastics machinery industries will likely experience a moderate downturn in the next year or two. I will have more to say about that in my column later this month. The business cycle is not dead, but there is presently no reason to believe that future downturns will be as long and severe as the Great Recession of 10 years ago.