Data shows manufacturing ‘bouncing back nicely'

Lest there be any doubt, the most important data and trends affecting the U.S. economy at the present time pertain to the recent, rapid and nationwide surge in COVID-19 cases. There is not much more I can add about this except to say that a solution to this crisis is most certainly on the way, and I believe our imminent victory over this version of the coronavirus will be total.

Sadly, I expect the death toll to rise for a few weeks before it eventually collapses; therefore, we owe it to our families and ourselves to maintain vigilance and not ignore the risks for just a while longer. There is no "one size fits all" strategy here, but rational adults can manage this for themselves without politicizing it.

I also believe the economy will get another infusion of relief funding from Congress sometime in the next quarter. This will definitely become politicized, so there is also some risk to this expectation. Thus, I am not sure of the size and scope, but I am including another round of some kind of funding in my base case forecast for the macroeconomy in 2021.

So, what does this mean for the plastics industry in the coming year? To start, I am pleased to report the recently released figures from the Federal Reserve indicate U.S. output of plastics products posted a small increase in October when compared with the same month a year ago. The October index for industrial production of plastics products was 112.0, which is just a tad higher than 111.9 registered last year.

Now the data will be revised several times, so it is possible this gain will be erased. But if it holds, the October figure marks the first time in 16 months this index of monthly production posted a year-over-year gain. The COVID crisis can be blamed for declines during the past eight months, but the plastics industry was experiencing a period of moderate cyclical decline before the crisis hit. I am not prepared to declare the industry is now "fully recovered," but I can say that after hitting bottom in April, the trend in this data has exhibited a V-shape. Nevertheless, there are some companies in certain segments that continue to struggle.

The trend in the overall plastics industry data corresponds to the trends in the data measuring consumer spending on goods, both durable and nondurable. I have charted these trends on the graph. This is a rate of change chart, which means I am measuring the rate of growth in the underlying data, not the actual levels of spending.

The chart indicates inflation-adjusted personal consumption expenditures (PCE) for durable goods is growing at a rate of 5 percent per year so far in 2020. Durable goods are things such as motor vehicles, appliances and construction supplies — things intended to last at least two or three years. Durable goods tend to cost more than nondurables, and spending for these types of goods tends to decrease sharply during periods of recession in the overall economy. This time is clearly different.

Spending for nondurable goods is growing at a rate of just over 2 percent this year. This is very close to the long-term average rate of growth in this data series. The trend in this sector is dominated by spending on energy products and groceries. Demand for these products can go negative during a severe recession, but here again, not this time.

It is no secret that the biggest loser during the recession this year has been the service sector. The recent decline in consumer spending on services is the sharpest in memory, and it might even be unprecedented. I expect this to have a significant impact on the trajectory of the recovery I am forecasting for next year.

What I am presently thinking is that total personal consumption expenditures account for about two-thirds of the overall U.S. GDP, and that expenditures for services comprises about 60 percent of total consumer spending. According to my number crunching, this means that consumer spending on services accounts for roughly 40 percent of the whole economy. This is a much larger piece of the pie than the domestic manufacturing sector, which accounts for less than 15 percent of total GDP.

Overall, the manufacturing sector is bouncing back nicely, but spending on the large and crucial consumer services sector of the economy, and all the jobs this sector represents, is still mired in a severe and unprecedented recession.

As 2021 progresses, I expect the service sector to recover. There is a huge amount of pent-up demand in this country for many types of services, and this will be unleashed as soon as the supply chain for the distribution of vaccines and therapeutics for COVID-19 is ramped up. But this will not happen overnight.

And I expect that during this time, aggregate demand for many types of manufactured goods will diminish. In other words, there will be a period of rotation away from spending for many types of goods and increasingly into spending for certain types of services.

There are far too many people still unemployed for aggregate demand to return instantly to the pre-COVID levels. Demand for manufactured goods has so far been kept afloat by government relief, and the next round of stimulus will continue to prop it up.

However, next year will be a period of adjustment in which the segments of the economy that were hardest hit this year start to recover, and the segments that actually benefited from the shutdown start to slow down. There are segments of the plastics industry that fall into this category. Demand for goods such as motor vehicle parts, construction supplies, appliances and packaging will start to revert back to their long-term averages. Spending for restaurants, travel products, non-COVID health care and live entertainment will start to recover. Overall, the U.S. economy will expand strongly in 2021, but the mix of spending driving this growth will be different than it is now.