Drawing details from 2023 to forecast 2024 economic trends

Allow me to channel my inner Jerry Seinfeld for a moment. Did you ever notice that economists spend most of December explaining what should happen over the next few months, but they spend most of January explaining what they think happened during the previous quarter?

Throughout the year I lean heavily on the monthly retail sales data reported by the Census Bureau, and the report for December is now available. There is also a steady stream of corporate earnings reports coming out for the fourth quarter. And the GDP report for the fourth quarter will be released at the end of this month by the Bureau of Economic Analysis.

So this is the month to glean and to process the important lessons from 2023. This entails holding myself accountable for the things I got wrong at this time last year, while at the same time searching for clues about what may happen next.

Total retail sales were strong in December 2023 as holiday spending came in higher than most analysts expected. When compared with the figures from December 2022, the strongest gains posted last month were at motor vehicle dealers, electronics and appliance stores, health and personal care stores, online retailers and restaurants. These five categories enjoyed year-over-year gains in the range of 10 percent. That's a nice way to finish out the year.

But the retail sector is about more than just the holidays. The trends in this data over the full year provide a good perspective on the choices American households are making about how they want to spend their money year-round. Many of the kinds of businesses upon which the Census Bureau reports each month are large end markets for many types of plastics products. Therefore, a longer-term view of this historical data is extremely useful for determining what will happen to demand for plastics in the coming months.

On the graph, I have the annual growth rates from 2023 for the major business categories from the report. There are a couple of things to keep in mind when studying this chart. First, the Census Bureau does not adjust this data for inflation. Adjusting this data would result in lower annual percentage gains for most categories than what is shown on the chart.

For instance, the annual gain for the total U.S. sales line, which is the sum of all of the subcategories, shows up as a positive 3.2 percent on the graph. However, if you adjust this number for the rate of inflation that prevailed through all of last year, this percentage growth would actually be negative. We should have a much lower rate of inflation this year, and this will mean the unadjusted growth rates for some of these categories will not be as strong as they were in 2023. But the trend in the underlying volume of sales will actually gain strength by either lower prices for these goods or rising purchasing power for most households.

One important exception to this mode of analysis shows up in the line for gasoline stations. Total sales at gas stations declined by 11.5 percent last year, but this was all due to the substantial decline in gas prices. The amount of gasoline consumed in 2023 likely increased when compared with the previous year. I do not expect gas sales to decline again this year.

This is where the analysis can get confusing. The total from gasoline stations pulled the overall total down. However, the fact that Americans were spending less for gasoline meant they had more money to spend on other types of goods and services. Motor vehicle dealers had a pretty good year last year, and history suggests that both the number of automobiles purchased as well as the average price paid per auto rise during periods when gasoline prices are low.

What does this mean for 2024? I expect the categories at both the top and the bottom of this chart to revert back to the long-term averages. Restaurant sales will not expand by another 11 percent this year, and sales at gas stations will not decline by 11 percent. Growth in restaurant sales will remain positive, and gas station sales will also see positive gains.

Total retail sales will register a gain in the range of 3-4 percent in 2024. The rate of inflation will be significantly lower than that this year. This means total sales volume for most categories of retailers will increase modestly, or at least hold steady, when compared with the totals from 2023. This outlook is based on the expectation that total wages for Americans will continue to expand faster than the overall rate of inflation, so households will have more discretionary income as the year progresses.

From the perspective of the plastics industry, the most important data is in the categories of motor vehicle dealers and building materials stores. The market for autos has been buoyed in recent years by a combination of pent-up demand resulting from the pandemic and low fuel prices. These conditions may change as the year progresses, but I am not sure by how much. The auto industry trend has risk to the downside, but there is also upside risk. I will just have to watch the data.

As for building materials, this sector is in dire need of a recovery. The trend in interest rates will obviously be crucial, but the trends in the labor market, materials prices, and the residential real estate data will also play a significant role. I do not have a dependable model for forecasting any of these trends right now, so here again, I will just have to wait and see where the data leads.