Need help budgeting for 2020? The watchword may be 'stability'

By now, every owner and manager of a business in the plastics industry is in full-scale forecast mode for 2020. People are saying there is currently a lot of uncertainty out there and this is affecting their ability to make plans.

I don't know how to measure uncertainty with any accuracy, so I don't know just how much additional pressure, if any, this is putting on overall economic activity at this time. But I will admit we are dealing with an interesting array of unresolved issues.

This year's list of "known unknowns" affecting our national economic future is topped by trade with China, the presidential election/impeachment and Brexit. The plastics industry can add tightening regulations on plastics products to this list. An interesting array, for sure. One thing we do know is 2020 will soon be here, and we need a plan if we want to optimize our opportunities and manage the risks.

In order to make a good forecast, you must start with a firm understanding of the present and the recent past. This will not guarantee your forecast will be right, but most of the things that will affect your business are not random events. Pertinent events most often occur for reasons that can be identified and measured. Therefore, the trends and momentum in the economic and market indicators will always provide useful insight.

Despite all the talk of uncertainty, the overall message I get from the macroeconomic data is one of stability. Things may seem dubious on the surface, but the underlying trends just keep rolling along. To better explain what I mean, this week I will analyze the trends in the U.S. GDP data. I will narrow the focus down to markets and indicators that more directly affect demand for plastics and plastics machinery in my future columns. But we must start by taking a good look at the big picture.

The U.S. economy is based on consumption, and consumer spending — the top line on the chart labeled PCE, which stands for personal consumption expenditures — accounts for more than two-thirds of our total economic activity. During the past 20 years, annual real growth in consumer spending has averaged just over 2 percent per year. In the past 10 years, since the Great Recession, this average rate of growth has climbed to almost 3 percent.

In just the past year, the growth rate cooled a bit to just over 2.5 percent, but the trend is still solidly and steadily upward. The data measuring employment, home prices, the stock market and household incomes are all quite high by historical standards, while interest rates remain accommodatingly low.

This means consumers will enter 2020 with plenty of momentum, and there is nothing to indicate they will curtail their spending behavior. While there is always the possibility of an unforeseen shock that could affect consumers negatively, there are also upside risks.

In 2016, the last time we had a major election year, the rate of growth in consumer spending was 2.7 percent. My forecast for inflation-adjusted PCE growth in 2020 is for a similar gain of 2.8 percent.

The trend causing me the most uncertainty is the recent decline in private investment. Business investment in new buildings and equipment accounts for about 80 percent of this category. If you look closely at the chart, you can see the recent trend is downward.

This category suffered the biggest drop during the last recession, so the average annual rate of growth in total private investment during the past 20 years was a bit under 2 percent per year. Since the end of the recession, this annual average rate has accelerated to almost 6 percent.

My forecast for growth in investment in 2020 calls for a flat year. Interest rates will remain low, but there is plenty of supply and capacity already in place to meet the anticipated rise in demand. Congress could accelerate investment spending by passing a comprehensive infrastructure bill, but I put the odds of that at no better than 50-50. If such a bill does pass, this will be one of the areas of upside risk I alluded to above.

The big-picture takeaway is that regardless of which time period you choose, the real rate of private investment in this country is chronically low. We cannot hope to accelerate the rate of growth in the overall economy if we do not increase our overall levels of investment.

The trend in government spending has been relatively flat in recent years, and I expect only a modest gain of less than 1 percent in government spending next year. Government spending growth has averaged just over 1 percent per year since the turn of the century, but the growth rate during the past 10 years has been absolutely flat.

Government spending accounted for more than 20 percent of the total GDP in 2000, but that proportion shrank to 17 percent in 2019. Despite the slow pace of growth, both the level of federal debt and the size of the federal budget deficit have expanded substantially. I am compelled to believe this will one day be a huge problem for our country as well as the entire global economy. But I do not expect this problem to rear up in 2020.

Net exports — the total amount of goods and services we export minus the amount we import — will continue to decline next year. We are a consumption-based economy, and this means we consume a lot of imported products. The data for net exports have averaged declines of just under 3 percent per year for the past 20 years, but this pace has accelerated to 8 percent per year since the recession ended. The forecast calls for another decrease of 5 percent in 2020 in net exports.

Like I said, if we invested more, then we could increase our level of exports and decrease the level of goods we need to import from other countries to meet the domestic demand. The result would be an increase in our total manufacturing base. This is another example of the potential for upside risk, but I certainly am not expecting it anytime soon.