Packaging outlook positive — with some caveats

My outlook for plastics packaging in 2019 is generally favorable, but I must confess I feel a slowly rising sense of trepidation about both the U.S. economy and the market for some these products.

By no means do I think it is time to become an alarmist, and I am not yet making any significant adjustments to my forecasts. But when it comes to packaging, there are some trends I am watching closely.

The most important factor in the outlook for the economy and overall packaging demand is always the trend in consumer spending, and here the news is good. Almost all the indicators that measure household incomes and economic activity levels suggest 2019 will be another solid year for consumer spending growth.

The employment data continues to beat expectations to the upside and this is creating some long-awaited, upward pressure on wages. Along with the stellar jump of 304,000 new jobs added in December, labor force participation escalated to a cyclical high point of just over 63 percent thanks to a gain in the labor force of more than 419,000. There was also a welcome decrease in the number of workers who were employed only part time for economic reasons. So, in spite of any expectations to the contrary, the labor market is still getting stronger.

As a result, the latest figures suggest that wages are rising at a rate in excess of 3 percent per year. This rate of increase is finally where it should be given the current levels of inflation and productivity growth. When these wage gains are combined with lower tax rates and lower gasoline prices, it is hard to suppress expectations for another increase in consumer spending, which is beneficial to suppliers of plastics packaging and other products.

Based on these factors, my current forecast calls for an inflation-adjusted increase in consumer spending for nondurable goods in the range of 2-2.5 percent in 2019. This will generate a rise in overall demand for plastics packaging of 1-2 percent this year. This is close to, if not slightly above, the long-term average for this sector.

Another factor that should stay favorable for plastics processors is low materials prices. Resin prices still exhibit a strong correlation with crude oil prices, and it is common for the price of petroleum products and petroleum-based materials to accelerate upwards during the latter stages of a business cycle. This occurs because the demand for these goods rises to a level that approaches the upward limit of global production capacity. But that does not look like it will happen in the near future.

Oil and natural gas prices are currently near cyclical low points, and most analysts expect only incremental gains in the prices for these commodities during the remainder of the year. This will keep a lid on resin prices.

These are the usual types of economic trends that are predominant in my forecasts for the packaging sector. To summarize, a moderate rise in demand combined with a modest rise in materials prices should result in healthy margins for the foreseeable future.

I believe this is the most probable outcome for 2019. But, as I said, there are some unusual things going on that we should all monitor.

One of those things is the near-term trend in consumer confidence. Confidence levels are still pretty high by historical standards, but the sharp decline in the recent months certainly has my attention. The chart illustrates the precipitous drop. Usually, consumer confidence data reflects employment and income data. When jobs are plentiful and incomes are steadily rising, consumer confidence is typically high. But not always.

The recent government shutdown clearly had a significant negative effect on U.S. consumer confidence. Hundreds of thousands of high-profile workers were forced to endure a long — and in my opinion, unnecessary — stretch of time without a paycheck. The confidence data should recover now that the shutdown has ended. But it is too early for me to state definitively that the threat of another shutdown is past.

I am also watching for any effects that an escalation in the trade tensions with China might have on this data. Again, I do not think a trade war is a likely scenario, but I will not be able to ignore such an outcome completely until an agreement is announced.

Those are the macroeconomic factors that could create the need for me to alter my outlook for the plastic packaging sector this year, but the industry-specific trend of product deselection must also be considered. By now, we are all aware that the number of bag and bottle bans is rising at an accelerating rate.

At the present time, I do not have a forecast for how large the impact from this trend will be, either this year or in the future. I have not yet seen enough data. I am sure that "sustainability" will be something we will hear more about. I am hopeful that "accountability" is also a rising trend. And not just governmental or corporate accountability, although these forms appear to be the most popular at the present time.

Nevertheless, I suggest that the most effective form of accountability is personal. Like maybe borrowing from or learning something about the recent concept of "extreme ownership." But whether you use the household recycling rate or some other measurement of personal accountability, it is far too low if we truly aspire to achieve sustainability.