US plastics industry will see above-average growth in 2022

It appears highly likely to me that the growth rate for the output of plastics products in the U.S. hit a cyclical peak in the second quarter of this year. If this is correct, then growth in the overall industry topped out at just over 6 percent for the current cycle, and it will now decelerate for the remainder of the year.

My latest forecast calls for the annual growth for the calendar year 2022 to end up at just over 3 percent.

For the sake of clarity, I will add some context to these figures. During the 12-month period that ended in the second quarter of this year, plastics processors increased their overall production levels by about 6 percent when compared with the previous 12 months. Due to the reasons drummed into our heads daily, this pace of growth will not be sustained going forward. The U.S. economy will downshift in the next few quarters, and by the end of the year, the 12-month growth rate for the plastics industry will calculate out to about 3 percent.

Now 3 percent growth for the U.S. plastics industry is a pretty good year. It is not a recession, and output levels overall will likely remain at or even above the levels they registered in the months leading up to the pandemic. Further, the average annual pace of growth in this industry for most of the decade before COVID-19 was exactly 2 percent per year.

So, despite all of the problems caused by labor shortages, skyrocketing inflation, sharply higher oil and resin prices, the war in Ukraine, kinks in the supply chain, a strong dollar, rising interest rates and burgeoning pressures to deselect many types of plastics products — despite all of that — the plastics industry still looks like it will experience an above-average year in 2022.

I realize a lot can happen between now and next January, so I am not taking anything for granted. But as of right now, things look far from dire to me.

I believe the same is true for the overall U.S. economy. The trends in the growth rates for the economy and the plastics industry usually move in similar patterns. Therefore, I believe we are also past the peak growth rate in the overall economy, though we will not get the official Q2 GDP data for a few more weeks.

Forecasting a turning point when you are either at or already past can be tricky, but it is not as difficult as predicting where the next turning point will occur. If we are currently near the peak, then the next turning point will be a cyclical trough. Troughs do not have to occur below the zero line, but when they do, it indicates negative growth — aka a recession.

You have likely noticed that the number of predictions of the next recession is rapidly rising. So far, most of the prognostications for a recession I have seen are calling for a mild downturn. Something of a necessary adjustment to get supply and demand closer to equilibrium and put a lid on inflationary pressures. There is a chance that we may avoid a recession altogether, but a mild recession is not out of the question for me at this time.

So, if a mild recession is the worst that might happen to us, how do you explain this?

Earlier this month, the University of Michigan released the preliminary results for its Index of Consumer Sentiment for the month of June. It will release the final results later this month, and there will probably be a small revision. But the preliminary value came in at 50.2 (1966=100) — the lowest value ever recorded. That's right, the all-time low.

It has been compiling and reporting this data since the early 1960s, which means it has been around for the Vietnam War, the OPEC oil embargo, Watergate, the Iran hostages, the dot-com bubble, Y2K, the housing bubble, my senior prom and a pandemic. And through all of those moments, the Index of Consumer Sentiment was never as low as it is now in June 2022.

The easiest explanation is that consumers are concerned about inflation, and I will admit that the rate of inflation is running a bit hot. Gas prices are averaging over $5 a gallon, and there are still a few kinks in the supply chain. But many of us have lived through worse than this, much worse in fact.

Not only that, but the labor market is as robust as it has been during my lifetime, and homeowner equity is also at a record level. So while the Fed is raising interest rates at the most aggressive pace we have seen in many years, it started at the ultra-accommodative level just above zero, and it is only aiming at a level that is considered "normal" by historical standards.

Clearly, we are not experiencing perfect economic conditions at the present time. But when have we ever enjoyed a perfect economic environment? And if what we have right now results in the lowest level of consumer sentiment in the past 60 years, then I am a bit concerned about what will happen when we encounter even greater adversity.

I recognize that measures of consumer sentiment or confidence have historically been unreliable indicators of consumer behavior, either present or future. I also realize that extreme levels of consumer sentiment or confidence often precede major reversals in economic trends — high sentiment levels may signal pending downtrends and low sentiment can indicate that an uptrend is imminent.

So I rarely put any weight on the monthly figures for the various indicators intended to gauge the mood of the American consumer. Moods are not always rational, and they can change very quickly. Nevertheless, the fear level is ratcheting up, and if this trend continues unabated, then irrational fear may get included in my risk assessment models going forward.

Bill Wood and Editor Don Loepp will discuss inflation and other economic issues during the Numbers That Matter Live webcast on June 28. Registration is free for subscribers.