Data for blow molders reflects larger economic issues

Wherever there is tension in the U.S. economy, blow molders seem to be right in the middle of it.

On one side, there is a slowly growing population that is fully employed and is gradually increasing its overall level of spending. On one hand, this means many businesses report difficulties in attracting and retaining qualified personnel, but overall business levels are good. On the other hand, business investment is decelerating — or in some cases, declining — and the manufacturing sector is already well into a phase of consolidation.

Economists, analysts and business leaders continue to struggle with the question of which of these forces, if any, exert greater influence on the economy in 2020. Will the strength of the consumer sector be enough to provide a soft landing for the industrial sector, which will then be followed by stability or even a return to growth in business investment next year? Or will the decline in business investment gain momentum and ultimately pull the consumer sector down with it. To put it more succinctly, will we have an overall economic recession next year or not?

On top of these cyclical macroeconomic forces, many blow molders are confronted by a marketplace that is increasingly disinclined to purchase their products, especially plastic bottles. The market move may stem from declining consumption of the product in the bottle, or it may stem from a reluctance to use a plastic bottle regardless of the contents.

Combining all of these factors, my outlook calls for a gradual decline in the overall production of blow molded products in the coming year. This decline will not be dramatic, and some of the segments and companies in the industry will buck this trend and solid growth next year. But trends in the recent data indicate a continued, downward drift in overall market demand.

Taking a longer-term perspective, I think the macroeconomic data is out of phase now, but it is likely to realign and return to stronger growth sometime in the future. However, the issues pertaining to market acceptance that affect blow molders at the present time represent the greater risk because they may persist, and even worsen, for a while.

There is not enough reliable, high-frequency data on the production of blow molded products for me to offer a lot of precision in my outlook for the various products and market segments. Nevertheless, I have compiled a table with some information from a few of the larger, well-established end markets. This is not an exhaustive list of blow molding end markets, and it likely misses some of the growth in the industry because it does not include newer products, which are replacing older ones. This downward bias notwithstanding, this data still sheds some light on market trends.

For consumers, their most frequent contact with blow molded products will likely occur when they consume beverages or household chemicals. These are also some of the markets where I see the greatest risk for overall decline in demand for blow mold bottles.

U.S. production of fluid milk has steadily declined for nine consecutive years, and the rate of decrease accelerated modestly in 2019. Production of soft drinks hit a cyclical peak in 2015. This industry is also in a period of accelerating decline, and as of now, the downtrend is accelerating rapidly.

I do not expect the trends for either of these end markets to return to growth for the foreseeable future. There may be smaller pockets of growth tucked into either of these large categories, but total market volume will remain negative in 2020. These were huge markets at one time, but now Americans definitively want less dairy and fewer sugary soft drinks in their diets.

U.S. output of soap, cleaning compounds and toilet preparations hit an all-time high in 2007 and then another cyclical peak in 2011. The trend in output has been flat to down since then. I confess to being somewhat at a loss to explain this trend, but I will not argue with the data. I expect flat to modestly higher output of these products next year.

One final consumer end market for blow molded products is the automotive sector. Total U.S. production of auto parts and allied goods hit a cyclical high point last year, but it is down just over 2 percent in 2019. Blow molded parts represent a small subset of this category, but the trend in this data is still relevant for blow molders suppling the automotive industry. To my knowledge, this industry is not deselecting plastic parts; in fact, it is just the opposite. I look for a small decline in this series this year and next, but the long-term trend will remain biased to the upside.

Finally, I looked at the data from some of the machinery end markets for large blow molded products. The trends in output for farm machinery and construction machinery are still quite positive. The data for commercial and service industry machinery is flat. The only negative category was the industrial machinery sector. All these sectors are highly cyclical, so periods of decline should be expected. I do not foresee any longer-term issues with blow molded plastics parts.

My forecast calls for a moderate decline in overall machinery production in the U.S. next year. This outlook is based on the current trend in U.S. business investment. Interest rates will remain low next year, and this will keep a floor under replacement market demand for these products.

The biggest risk to business investment at the present time is the continued uncertainty among business leaders about the future trajectory of the American economy. This is starting to improve when compared with recent months, but I anticipate that it will take a while before this shows up in the data.