For those of us interested in macroeconomics — that should be everybody, by the way — 2023 is off to a volatile and invigorating start. The majority of the news releases for the major economic indicators from the month of January have been, for lack of a better word, dramatic.
Here are some highlights from just the past couple of weeks:
• According to the Bureau of Labor Statistics, the number of jobs in the U.S. jumped by 517,000 in January. This was much higher than anybody expected. Under normal circumstances, more people employed is good for the economy in the long run. It means the economy is strong. It also means we might avoid the pending recession we have been concerned about for the past few months.
Unfortunately, there is a downside. In its efforts to tame inflation, the Fed is trying to tamp down demand. If demand is sufficiently suppressed to curb inflation, then the economy should be shedding jobs, not creating a lot more of them. The implication of a surge in the January jobs number is that the Fed will have to raise interest rates even higher, and that it will have to keep rates higher for longer.
If there was a silver lining in this jobs report, it was the overall change in wages was modest. A strong demand for labor tends to push wages higher, and this in turn tends to be inflationary. But for now at least, the upward pressure on wages remains subdued.
The bad news about this is the change in inflation-adjusted wages is still negative. Any gains in workers' paychecks are being far outpaced by the rise in the price of groceries and rent. This is unsustainable in the long run, but how much longer can it persist? That brings us to the second data surprise of the month…
• The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for January escalated 0.5 percent from the previous month, and it was 6.4 percent higher than the same month a year ago. The surprise here is CPI posted two consecutive months of modest gains at the end of 2022, and there was a strong consensus among many of us that inflation was starting to moderate.
I still believe we are past the peak rate of inflation, but the CPI data from January indicates we are far from the coveted balance between supply and demand that will result in the desired rate of overall price pressure. Here again, the implication is the Fed will have to push interest rates higher for longer.
What does all of this mean for the future for the plastics industry? Truthfully, I can only respond with plausible scenarios. What I do know is that the plastics industry is deep and diverse, and it touches almost every sector of the U.S. economy. I also know the majority of plastics products are consumed via retail channels. Therefore, a crucial data set for clues about trends in the consumption of plastics is the data on U.S. retail sales.
• According to the Census Bureau, total retail sales in the U.S. were up 6.4 percent in January when compared with a year ago. This was a surprisingly strong number, especially considering the fact that total retail sales gains were much more subdued in November and December.
In my efforts to garner a glimpse of an understanding of what all of this means for plastics processors, I created a table that shows percent changes in sales for the major types of retail establishments. Many of these categories represent large end markets for plastics products.
The first thing that catches my eye on this table is the magnitude of the changes in most categories. We all know we are collectively still trying to recover from the pandemic-induced recession, but even so, this table is full of numbers nobody could have predicted. When you think about supply chain shortages and labor market shortages and skyrocketing rates of inflation, they are all reflected in some way in the figures on this table. We have never seen numbers like this, and once is enough for me.
But all of that is in the past. The trick going forward is to tease out the signals from the noise. For a start, it helps to know the retail sales data is reported in dollars, but they are not adjusted for inflation. That means that some of the growth represented in the table is due to price increases. Strong demand drives prices higher, but a portion of the percentage gains is due to higher prices, not higher volumes. The push and pull relationship between demand and prices during the past three years will take years to understand completely.
How much of the observed change is due to price and how much comes from volume varies from category to category. Nevertheless, it is obvious from this table how energy companies such as ExxonMobil were able to achieve record-shattering profit levels last year. For plastics processors, I will offer the following examples of how I am going to try to hone in on some useful signals in 2023.
The data for motor vehicles and parts is always of interest. The Census Bureau data on retail sales indicates receipts increased by 2.8 percent in January. The BLS data on prices indicates the price of a new vehicle increased by 5.8 percent in the same month. After a quick calculation on this data, I get a figure suggesting the volume of cars sold might have actually declined by about 3 percent last month. This suggested drop in volume can be checked when other vehicle sales data is reported later this month.
This method of analysis is not perfect. The comparisons are not always completely apples to apples, and all data is subject to future revisions. But if you do this over a period of time, you start to get a feel for what is happening, and this can be enough to give you an edge in your planning and forecasting efforts.
I will finish with one more example. The sales data indicates that receipts at food and beverage stores (groceries), a huge end market for plastics packaging products, advanced by 5.3 percent in January. The CPI shows grocery prices jumped by 11.3 percent in the same month. Historically, the data on U.S. grocery store sales is predictable and not volatile. These January numbers are not typical, and they are not sustainable. And they offer bigger clues as to what might happen in not only the packaging industry, but also the overall economy and policy decisions going forward.