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October 21, 2020 04:26 PM

Millennial offers plastics processors her economic outlook

Catherine Kavanaugh
Plastics News Staff
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    Cara Walton

    Economic recovery is at least a year away and the financial struggles of millennials and the middle class are of particular concern to Cara Walton, a next-generation economist who spoke at MAPP's virtual Benchmarking and Best Practices Conference.

    Walton, 24, pointed to five of the leading economic indicators that companies should watch as they set business strategies amid a recession that started in February, a global pandemic that was declared in March and an election year in a divided America.

    An engagement manager for Harbour Results Inc. in Southfield, Mich., who studied economics at the University of Louisville, Walton said the five key data points — unemployment, consumer spending, consumer debt, government debt and banks — tell a lot about the health of the U.S. economy.

    Walton noted there have only been three times that the U.S. unemployment rate significantly exceeded the 10-year average of 6.5 percent: the Great Depression from 1929-33, when it took 18 months to reach the peak level of unemployment of 11.9 percent; the Great Recession from 2007-09, when it took 22 months to reach 9.4 percent unemployment; and spring 2020.

    "Due to the COVID environment, it took us two months to reach 14.7 percent unemployment," Walton said of the record-high rate in record time. "That's obviously dramatically different than other historical scenarios."

    While the unemployment rate improved to 7.9 percent in September, it is falling at a lower rate than it has historically.

    "From June to July, we saw a 2.2 percent drop in unemployment. It's a pretty dramatic drop in just a one-month span," Walton said. "But when you look from August to September, we only saw a 0.5 percent drop, and that improvement in September was driven more by people leaving the workforce than by more people finding jobs."

    Walton pointed to the big trend of women opting to stay home due to child care responsibilities, which now include home schooling and monitoring online classes.

    Of the 1.1 million people ages 20 and up who left the workforce in August and September, more than 800,000 were women. In addition to parental responsibilities, they have seen jobs dry up in female-dominated professions like hospitality, education and some parts of the health care system. These industries have an unemployment rate of about 22 percent, while the manufacturing sector is in better shape at 6.7 percent, Walton said.

    The duration of unemployment averages 18 weeks, but 2.4 million Americans have been out of work for 27 weeks or longer, she added.

    "That's concerning," Walton said. "When you get past that 27-week point, you're looking at diminishing returns of the ability to get your job back again or find a new one."

    She expects more jobs to be lost in addition to the tens of thousands of positions just put on the chopping block by Walt Disney Co., Allstate Corp., and American and United airlines.

    "Many retail companies are keeping people on board right now because they have high hopes for what's going to happen with holiday spending," Walton said. "But unfortunately if things are going the way they have been for a while, we may not see the rebound we need and more people may get laid off in the first quarter."

    Continuing unemployment will drive a prolonged recession because consumers won't be able to sustainably spend money, Walton said. She noted that many Americans put their stimulus checks toward necessities like food, utilities, household supplies, rent and mortgages. She said overall, disposable income has decreased 1 percent compared with a year ago, if government benefits like stimulus and unemployment checks are removed from the equation.

    To get by, 30 percent of lower-income individuals, who make $25,000 or less, are using credit cards to pay off purchases over time, 42 percent are borrowing from family and friends, and 46 percent are selling things.

    "These people can't sustainably spend money, and unfortunately, the middle class isn't doing much better," Walton said of the group making less than $100,000 a year. "They're doing similar things at similar rates."

    She is especially concerned about the middle class.

    "These people are buying cars and appliances and potentially building a new home and doing the things we need them to do to improve the manufacturing industry," Walton said.

    While millennials have buying power, they also have debt. Born from 1980-96, 72 million millennials have average incomes of $40,532, which is about $10,000 below Gen Xers and baby boomers, Walton said.

    However, millennials carry an average debt load of about $78,000, driven mostly by student loans. Gen Xers and boomers carry debt loads of $96,000 to $135,000, mostly home mortgages.

    "When most millennials got their college degrees, they were seeing dramatic increases to the cost of that degree," Walton said, adding the cost of the average undergraduate degree increased 68 percent in the last 20 years.

    Student loan delinquency rates are now exceeding their 10-year averages, too.

    "Looking at the strapped financial situation of the millennials coupled with the strapped financial situation of the middle class, we're going to see a prolonged recession," Walton said.

    Then there's the federal deficit, which is at a level not seen since the U.S. financed World War II in 1946. And lending institutions are tightening belts. Three banks —CitiGroup, JP Morgan and Wells Fargo — have seen more than a 500 percent increase in bad debt along with declines in their net investments, Walton said.

    "So, they're not sitting in comfortable situations," she said.

    Banks are issuing fewer loans so working capital will tighten and that could hamper some manufacturers needing to buy new equipment, Walton noted.

    Cost structures are going up, too, for taxes, personal protective equipment for employees, cleaning services for facilities and wages. Businesses in places like Cleveland are offering higher pay, signing bonuses and flexible shifts to compete against companies like Amazon for new workers.

    Although the stock market is doing well, Walton said it's a forward-looking indicator that is betting on a vaccine sooner rather than later.

    "What we know right now is that we won't see that vaccine until at least mid next year and then from there we will deal with a series of supply chain and logistical challenges," Walton said.

    No matter who wins the presidential election, she said, her forecast puts economic recovery at least 12 months out. A healthy economy is tied to a healthy population, she added.

    "Ultimately, we will not see economic recovery until we get the virus under control," Walton said. "We need to have people consistently comfortable to leave their homes. We need to have students back in school so parents can go back to work and other things that will allow us to see a booming economy again one day."

    Manufacturers Association for Plastics Processors (MAPP) is based in Indianapolis.

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