Consumer spending to drive plastics industry growth

In my previous column, I took a high-level look at the prevailing trends in the U.S. GDP data, and I offered an outlook on the U.S. macroeconomic performance in 2020. Consumers are the driving force in the U.S. economy, so for this week, I have narrowed my analyses and forecasts down a bit to cover the trends in three major indicators of U.S. consumer behavior. These also happen to be three of the biggest end markets for plastics products. Next week, I will analyze and forecast the trends in the data that specifically measure activity levels for the plastics industry.

So far, fourth-quarter demand for motor vehicles in the U.S. has surprised to the upside. The same can be said for 2019 as a whole. This year's numbers are running just a bit below comparable figures from last year, but they are still better than I expected.

My outlook for the U.S. motor vehicle industry calls for another moderate decline in 2020, and by moderate decline I mean a drop of less than 5 percent when compared with the totals from this year. This will put the annual total for vehicles sold in the U.S. — domestics plus imports — between 16.2 million and 16.5 million units in 2020. In terms of the number of motor vehicles assembled in the U.S., the annual total is expected to come in between 10.5 million and 10.8 million units.

In the spirit of full disclosure, I must admit this latest forecast is similar to my forecast from one year ago, and that last year's forecast was a bit too pessimistic. By the time the final tally is reported for this year, the total number of vehicles sold in the U.S. will be right at 17 million units. I originally predicted a number closer to 16.6 million. The total number of assemblies in 2019 will likely exceed 11 million units by a whisker. My earlier call was for 10.8 million units.

The idea here is not to point out how good — or bad — my forecasts were. But rather to say that the demise of the motor vehicle end market has been exaggerated for the past couple of years. The peak year in the most recent cycles for both sales and assemblies was 2016. But the past three years were still relatively strong by historical standards. The trend from the fourth quarter of this year indicates consumers are still buying a solid number of expensive cars, and this bodes well for suppliers to this market next year.

Through the first three quarters of 2019, the total number of new houses started in the U.S. was down just over 2 percent when compared with the same period a year earlier. But here again, the data from the fourth quarter is surprisingly strong. Due to seasonal patterns, I tend to not lean too heavily on the data from the fourth quarter; however, it is conceivable that the gain in the fourth quarter will be enough to push the annual total up to flat for the year. And that is too much momentum here at year's end to ignore.

Based on this recent surge in activity, I have raised my forecast for housing starts in 2020 up to a gain of 5 percent. This will put the annual total in the range of 1.3 million units for the year. The last time the annual total for housing starts hit 1.3 million units in a year was 2007.

Those of us who track the plastics industry closely tend to think of the auto sector as a bellwether for demand for plastics products. But one of the best leading indicators for the auto industry in particular, and the U.S. consumer sector as a whole, continues to be the trend in housing starts. If it is a good time to buy a new house in America, it is a good time to buy almost everything else.

Household incomes are rising faster than the rate of inflation, home prices are also rising, yet interest rates remain quite low. Furthermore, the rate of new household formations is not only rising, but the pace of growth has accelerated in the second half of this year. So I expect the residential construction sector of the U.S. economy to remain quite healthy in 2020. The major impediments to demand growth for plastic construction materials next year will continue to be due to supply constraints, namely the shortage of qualified workers.

The early returns suggest that consumer spending during the critical holiday season is strong, and I am monitoring this data even more closely than usual this year. If we are going to rely on consumers to carry the economy for the next couple of quarters while the business sector shakes off all of their collective uncertainty and starts to increase investments in new plants and equipment again, then we need to see a strong holiday season.

The retail sales data I prefer to use as an indicator excludes sales of autos, but it includes products such as electronics, appliances, toys and other types of consumer goods. And all of these are large end markets for the plastics industry. But the main reason I use this data is to gain insight into demand for plastics packaging products.

Total U.S. retail sales minus autos are on pace to post a gain of 3 percent. Adjusting for inflation gives us a real growth rate of between 1-2 percent this year. My forecast calls for an increase in 2020 to just over 4 percent, which will result in a real growth rate of about 2.5 percent in total retail sales.

Historically, this pace of growth in retail sales would generate a rise in demand for plastics packaging products of close to 2 percent. But these products are currently under attack, and I have growing concerns about just how far this attack will go. I believe the inherent value to society of many types of plastics packaging will ultimately be recognized, and our industry will ultimately be seen as part of the solution rather than the problem. But that is likely to take a few years, and the impact of this issue in 2020 will be largely negative.