Plastics firms face rising wages for skilled workers

The risks of a recession in 2019 and the fears associated with those risks have dissipated as this year has progressed, and my forecast for moderate economic growth over the next few quarters is still intact. But while overall business conditions remain positive for most segments of the plastics industry, there will still be challenges for U.S. manufacturers.

At this stage of the business cycle, one factor affecting a steadily expanding number of plastics processors and suppliers is the two-headed problem that occurs when labor costs rise at an accelerating rate while growth in company sales is decelerating. The result is increasing pressure on profit margins.

It is no secret that the labor market across all sectors of the U.S. economy is tight. The total number of job openings is at a historically high level. It is so high that there is less than one unemployed person per job opening. This gap is the widest for jobs in the high-wage industries. So it is no surprise that total wages are rising at an accelerating rate.

For many people, especially workers, this is good news. The expanding "wealth gap" between the high-earners on the upper end of the pay scale and the low-income households that rely on lower-wage jobs is a major topic of debate among policymakers and economists. I am quite comfortable in predicting that both the volume and intensity of this debate will increase over the next 18 months.

The good news is that higher wages mean more households will have more money to spend. This will benefit the plastics industry. More money in the hands of U.S. consumers typically means more revenue for U.S. manufacturers.

The bad news is that accelerating wage growth is almost always accompanied by accelerating inflation. At the present time, a moderate increase in the rate of inflation is acceptable. Some analysts would even consider a bit more inflation to be beneficial. But if inflation starts to accelerate too rapidly, the Fed and the bond market will react by raising interest rates. This is something to monitor for the rest of the year. The markets and policymakers are striving for an elusive balance.

Managers and business owners are also seeking a balance between the prospect of rising revenue in the future and increasing pressures to raise wages in the present. Employees require a level of commitment that is usually not matched by customers, and business owners are always exposed to this risk. Because of the strong labor market, businesses are also exposed to the risk that employees could leave for a higher-paying job. Like I said, this is a two-headed problem.

Every company and employee situation is unique; therefore, every manager will have to deal with these risks individually. But there is some useful information that can be gleaned by the overall trends in the macro-level data.

As the table indicates, the rate of growth in the total industry has risen to 3.2 percent. This is the fastest pace of growth since the Great Recession ended 10 years ago. Though it is clearly starting to rise, this rate is still in most analysts' comfort range because it is sustainable.

If you take the average rate of inflation over the past few years — say somewhere in the range of just below 2 percent — and you combine it with the long-term average of about 1 percent in the rate of productivity gains in the U.S. economy, it indicates that wages can increase by about 3 percent without too much difficulty. If the rise is much faster than that, then you will either need to achieve greater productivity or you will get higher inflation.

So as this data pertains to the macroeconomy, I am not yet too concerned. But I am starting to pay closer attention.

As they pertain to the plastics industry, my level of concern is considerably higher. I have listed the industry sectors in terms of average hourly earnings from highest to lowest. According to this data, the average worker's wage in the manufacturing sector is below the overall average. And the average worker's wage in the plastics products segment is well below that of the average for manufacturing. This data suggests that the only industries in which workers average lower wages than the plastics industry are retail trade and leisure/hospitality.

This is not good news for an industry that must go to the labor market every day and compete for the talent and skills that are required to keep up with the rapidly changing marketplace for products and services. If this data is at least in the ballpark, then the fact that the rate of growth in plastics industry wages is at least keeping pace with the overall average gives me some comfort. But we will have to do much better if we are going to thrive in the long run.

Most of us probably remember coming of age in a time when labor was plentiful and the biggest constraint on both our economy and our industry was the intense competition for capital. We also believed that the manufacturing sector provided "good-paying jobs." Manufacturing jobs were synonymous with "middle class" and thriving communities.

That described the community and the household in which I grew up, and it described the job market I entered coming out of college — there was always somebody else that was willing to take your place if you didn't produce. But that situation has changed dramatically in recent years. We must now come to terms with a competitive situation in which capital is relatively plentiful, but we are constrained by a growing shortage of skilled labor.

This means the price for skilled labor will continue to rise. The longer-term question for the plastics industry is whether it can innovate and invest enough in its people, products and processes to compete.