Medical market in recovery mode but tariffs linger

The long-term outlook for plastic medical equipment and supplies are quite favorable. All the established demographic and technological trends spurring the market remain intact: The global population is aging, global access to medical care is expanding and rapid technological advances continue to bring new products and information to the market.

If you take a multiyear perspective, I expect this sector to grow faster than the overall economy for the foreseeable future. Nevertheless, there are some short-term factors that will likely affect how well this sector will perform this year. The growth rates for the U.S. economy and the overall global economy are expected to decelerate in 2019. And, as we all know by now, global trade is also expected to slow. Usually trade activity slows as a result of slower overall economic growth, but this time it is probably the other way around.

That means if we can get the uptrend in trade started again, we should get another bump in economic growth. But until this happens, all the uncertainty and the new tariff barriers will create a drag on medical equipment and supplies. At least one-third of these products that are manufactured in this country are exported, and some of these exports will likely now be subjected to increased tariffs.

It is too early to tell which way the latest round of negotiations with China will fall, but my best guess right now is we will get some agreement that will stretch the decision out a while longer without achieving a real deal. Meanwhile, folks are still getting older and access to medical care is still steadily improving. So I think this sector will still expand, just not a fast as it might if the export pipeline was wide open.

As always, we will need to watch the indicators. And though it includes a wide range of products — not just those made of plastic — I find that the Fed's index on the industrial production of medical equipment and supplies is a useful indicator for plastics companies that supply the medical industry. For January, the index came in at 94.3 (2012=100). This was a little below the December figure, but it was a solid increase of 4 percent when compared with the same month a year ago.

As you can see on the chart, this data hit a cyclical low point in January 2018, and it has trended upward for most of the past 12 months. The latest leg upward even accelerated in the second half of last year. Based on the cycle, I expect the uptrend to continue through this year, and my forecast calls for an annual gain of 4 percent in the total U.S. output of medical equipment and supplies in 2019. This will get the line on the chart back up to just below the 100-level, and it follows two consecutive annual decreases of 3.6 percent in 2017 and 2.4 percent in 2018.

It is worth taking a closer look at the cyclical nature of this data, because historically it has exhibited a reliable rhythm. Starting with the low point in 2007, this data printed a cyclical low every two and a half years — almost to the month. A typical cycle had a recovery phase of about two years followed by a downtrend of approximately six months.

Based on this pattern, the most recent downward phase should have put in a low point right at the beginning of 2017, somewhere near the 95-line. It looks like it tried to do just that, but it ended up suffering another leg lower in the second half of 2017, to a low point of 90.8 in January 2018. Extended cycles occasionally occur, and usually when the prevailing trend up or down is particularly strong. This particular downtrend did not appear to be unusual because it was only coming from a high point near the 100-line. A drop from top to bottom in the range of 4-6 percent would have been well within reasonable expectations.

We now know the trend extended out in time and down to a low point 9 percent below the peak. That doesn't necessarily mean our forecasting model is wrong and we cannot continue to use it. But it is a reminder that no model is perfect and you should always be prepared with an alternate thesis. Often the trend reverts to its usual rhythm, but not always. At this moment, I do not know of any significant structural changes to this market, so I believe the most likely outcome will be a continuation of the uptrend through most of 2019.

Because there is such a wide range of plastics products that are included in this sector, there will be a wide divergence in their growth rates. The markets for many types of plastic medical supplies are mature, and they will therefore only experience a pace of growth that corresponds with the pace of the overall economic expansion. Other product categories are brand new or they are opening brand-new markets overseas. The pace of growth for these products will likely be much more robust. But the important point for most all plastics manufacturers is that this cycle is now back in recovery mode.

As you can see on the chart, this data hit a cyclical low point in January 2018, and it has trended upward for most of the past 12 months. The latest leg upward even accelerated in the second half of last year. Based on the cycle, I expect the uptrend to continue through this year, and my forecast calls for an annual gain of 4 percent in the total U.S. output of medical equipment and supplies in 2019.