Despite increased talk, few worries about the near term

In my never-ending quest to bring to light the latest and most prescient economic indicators, I have discovered yet another number that matters … well, maybe.

According to the website Google Trends, the number of times the topic "recession" was "Googled" this month spiked to a level not seen since the first quarter of 2009, which just happened to be the depth of the Great Recession.

Their index for interest in "recession" in August is 79. For further context, the index for this topic in July was a mere 20. The interest in "recession" last December, a month in which there was a significant stock market correction, topped out at 32.

I am not sure what sparked such a vigorous interest in recessions this month, but I am increasingly concerned that we might just be talking our way into one.

Like I said, this is a new indicator for me, so I decided to compare it to something more familiar. I have included a chart of the rate-of-change curves derived from the Federal Reserve's monthly index on industrial production for the U.S. manufacturing sector and the index that measures U.S. output of plastics products. The plastics data is a subset of the manufacturing data.

This chart indicates that the growth rate in the total manufacturing data hit a cyclical peak at the end of last year, and it is currently in a period of decelerating growth. Such a period of decelerating growth is often the precursor of a period contraction in the data, but not always.

The quarterly growth rates from both the first and second quarters of this year were positive. For the year to date, total output for U.S. manufacturers is up less than 1 percent when compared with last year, but it cannot be accurately stated that the manufacturing sector is contracting. At least not yet.

The trend in the data from the plastics industry, which includes molded and extruded products but not resins, tooling or machinery, is less encouraging. The growth rate for our industry hit a cyclical peak in the middle of 2018, and the downward trend has persisted for more than a year. The quarterly growth rates for the first two quarters of 2019 were negative, and for the year to date, the total output of plastics products by U.S. processors is down just over 1 percent from last year.

The decline this year has been relatively modest; nevertheless, it is still fair to call it a contraction. I am not surprised that we are getting a modest cyclical correction after such an extended period of expansion. The last time there was an annual decline in output for the plastics industry was 2009, the year of the Great Recession. But I believe that we are close to the next cyclical bottom on this graph.

Based on the slope at the very end the plastics graph, I expect the current downturn to be both shallow and short-lived. This means this data will likely enter an early recovery phase in the next few months.

As you can see, the graph for our industry tends to be more volatile than the graph for total manufacturing, and the turning points in the plastics curve often occur a few months earlier. If we can post a cyclical bottom in the plastics graph, then it is likely the manufacturing trend will recover shortly thereafter.

It is certainly worth noting that the average annual growth in total manufacturing output in the U.S. during the past 10 years has been right at 2 percent. This is no coincidence since that is also the average rate of annual growth in real U.S. GDP during that time. The plastics industry, you will be glad to know, has posted average annual growth of 2.7 percent during the past decade.

I emphasize these average annual growth rates because they represent an important recovery story. As you may recall, both the plastics industry and the total manufacturing sector grew much slower than the overall economy during the first decade of this new millennium, the period from about 2000 through 2009. We still have more work to do, but we are making meaningful progress in our collective efforts to reinvigorate American manufacturing prowess.

As for the coming few quarters, none of the other indicators that I use to monitor and analyze demand for plastics products are currently exhibiting substantial declines. The growth rates in the data from important end markets such as autos, housing and consumer nondurables are certainly decelerating, and in some cases, they may be slowly declining. But the actual data for all the major plastics end markets remain at strong levels. And the crucial data on employment, household incomes and consumer spending continues to improve gradually.

It is far from obvious to me the manufacturing sector in this country is headed for an outright contraction. And in the U.S., a mild contraction in the manufacturing sector does not portend another economic recession. At one time, a decline in the manufacturing data in this country was a sure sign of a recession in the overall economy. But not anymore. The manufacturing sector went into a period of contraction in 2015 and 2016, but the overall economy expanded at the salubrious rate of 2.9 percent in 2015 followed by a 1.6 percent gain in 2016.

I mentioned I am not convinced we cannot be talked into a manufacturing contraction. I am allowing for the possibility consumers could rein in their spending patterns under certain circumstances, which are at least on the radar at the moment. These could include things such as an implementation of tariffs on consumer goods during the holidays and a major stock market collapse.

But the financial condition of U.S. consumers is structurally much stronger now than it was prior to the last recession. This means, based on all the known information, the U.S. economy could weather a period of economic contraction much better than we did 10 years ago. That severe recession may still be fresh in our memories, but the current economic conditions are markedly different. Therefore, I have few worries about the near term, despite sharp increase in certain internet searches.