Key words in an economic outlook for 2022? ‘Above trend'

As we put the finishing touches on our forecasts for next year — and also prepare for a reboot of our traditional holiday festivities — I want to take another look at a theme that has dominated the economic data this year. I believe this theme will continue to dominate the data in 2022. The theme to which I am referring is best described by the phrase "above trend."

Above trend means the monthly or quarterly data is going up at a significantly faster speed than it did for the previous 10 years or so. A graph of such data will exhibit a steeper slope in the recent months.

There are so many important data series currently running above trend that I have almost started to take this condition for granted. Please don't get me wrong.

The fact that U.S. GDP is currently expanding at a pace that is well above trend is a good thing, and I expect it to continue. But we are also experiencing above-trend rates of expansion in inflation, wages, hiring plans, employee quit rates, supplier delivery time, resin prices, energy prices and cumulative debt levels. These trends have tested — and will continue to test — our cumulative management skills.

For the past year and a half, we have had to learn how to manage the bad with the good at a level that is also above trend. And a steep upward slope in the learning curve we have been climbing will continue in 2022, but I expect things will also start to improve next year.

My optimism is based on a number of trends that have recently emerged, and I want to share one of my favorite charts with you as we end the year.

This chart, which is part of the U.S. GDP data set compiled and reported by the Bureau of Economic Analysis, shows inflation-adjusted business investment in industrial equipment. This is the category that includes investment in plastics machinery and equipment. These are capital expenditures, and economists often refer to this category of business investment as "capex."

As the chart indicates, capex for industrial equipment was trending nicely upward from 2011 until the end of 2019, and then the data dropped sharply. This decline actually started a few months before the outbreak of COVID-19, but it was no doubt exacerbated by the shutdown in 2020. And then the recovery phase kicked in.

The data not only started to recover in the second half of last year, but as you can see, it recovered at a pace that was substantially faster than the previous decade. This pace was well above trend. Investment in industrial equipment got back to the pre-COVID level in the first quarter of 2021, and then it jumped even higher. For the year to date, the inflation-adjusted increase is 14 percent, and it would likely be even higher if not for the supply chain issues.

I have confidence that the trend upward will continue throughout 2022, but the pace of growth will moderate from the unsustainable rate of 14 percent we have experienced this year. Because of the unprecedented economic conditions we currently face and the difficulties these cause when preparing a forecast, I have decided to present a range of growth that I believe has a high probability for next year rather than a single number. When plotted on a chart, this range takes the shape of a cone. Obviously, I will need to fine-tune this forecast as the year progresses, but this is where I will start it for now.

The lower boundary on my forecast cone (red) represents a growth rate of 0 percent. In other words, that is the path the graph will take if businesses invest the exact same amount for industrial equipment in 2022 as they invested in 2021. The upper boundary (green) represents an inflation-adjusted growth rate of 5 percent. The line in the middle (yellow) is what you get if the quarterly investment totals stay at the current level, and this represents an annual growth rate of 3 percent. To summarize, my current outlook calls for a real gain of between 0-5 percent in 2022, and I think the risks to this forecast skew to the upside. In other words, this forecast may be a bit pessimistic.

There are several factors that have created an environment conducive to investment in equipment, and these factors should persist for at least another year. One of these is extremely low interest rates combined with easing access to credit. We know interest rates are going to rise someday, but at the present time there is no indication they are going to rise quickly. Furthermore, there is evidence that banks are easing their lending standards to business clients. This situation is fluid, so it merits close attention, but right now it strongly favors increased investment in new business equipment.

Another factor favoring more investment is persistently strong demand for manufactured goods. With few exceptions, the data on consumer spending, retail sales, and household incomes is rising at rates that are above trend. Amplifying these trends are the exceptionally low inventory levels for many types of goods. So even as the pace of growth in consumer spending begins to moderate, which it will have to do at some point, there will still be the need to replenish depleted inventories. The lack of sufficient inventories for many items is currently constraining growth, but the upside to this is that it will likely stretch the recovery further into the future.

I will add one more factor that could strongly contribute to the growth of investment in industrial equipment in the coming quarters and even years. I will admit this factor is more aspirational than actual at this moment. But 'tis the season to aspire, so consider this my new year's wish list. As we emerge from pandemic restrictions and start a new year, I hope we have collectively learned from this experience.

I will be disappointed if we are content just to survive the pandemic. I would prefer that we get to the other side stronger and wiser for the experience and that we act on our hard-earned strength and knowledge with alacrity.

Specifically, we need to continue to invest in industrial equipment at an aggressive rate so that we can build a national supply chain that is more dependable, robust, resilient, productive, energy-efficient, sustainable and inclusive. To achieve this objective, we will undoubtedly need an even greater number of plastics processors, machinery and employees producing more plastic products specifically and intelligently designed for this purpose.

This industry has both a tremendous legacy as well as a crucial purpose for the future. That is a great gift. Here's wishing you a festive holiday season and a prosperous and healthy new year.