It has been about six months since the coronavirus-induced shutdown of the economy was initiated, yet my efforts to forecast the future path of the American economy are not getting any easier. It seems to be quite possible that a year from now the U.S. economy will be firing on all cylinders with a robust growth rate and strong employment numbers. Or then again, maybe not.
I wrote a few months ago that restarting an economy this large and complex after an intentional, unprecedented and severe shock of the kind we experienced in the second quarter might require a feat of economic magic. We have made considerable progress toward achieving such a feat, but we still have a long way to go before the trick is complete.
Based on the trends in the data so far, I remain optimistic that the U.S. economy will return to a phase of solid growth in 2021. Nevertheless, I believe there are three risks to this forecast at the present time that I cannot ignore. The biggest risk is that we do not find either an effective cure or a vaccine for COVID-19 in the next few months. Our human species will eventually develop herd immunity over time, but if we want an economic recovery next year, we must restore our nation's confidence level with a victory over this disease before we get hit by another big wave of infections.
The other two risks are even more immediate in nature. Regardless of our success in finding a vaccine, Congress must deliver another round of fiscal stimulus in the coming weeks. The first round of stimulus kept the economy moving by keeping people employed or providing additional unemployment benefits. But the effects of this round will soon wear off. My base case forecast assumes Congress to authorize another round before the election, but I have to acknowledge there is a chance they might not do so.
The final visible risk is the upcoming election itself. I cannot yet handicap the results, but I do think there is a possibility of downside risk to economic growth in the aftermath, no matter what the outcome.
But even if my forecast for a solid recovery in the overall economy in 2021 turns out to be accurate, that does not mean all sectors of the economy will grow next year when compared to their respective performances from this year. There are many sectors of the U.S. economy that have clearly benefitted from the complete shutdown of other sectors. Here, I specifically refer to certain segments of the plastics packaging sector, particularly food and household chemicals packaging.
On the graph I have charted a 12-month rate of growth curve and my forecast for next year for retail sales at grocery stores. This is a useful indicator for measuring overall demand for food packaging products, including many types of plastic film and sheet.
The chart clearly shows a sharp upward spike in the growth rate for sales of groceries. This is by far the fastest rate of growth ever for this data set. During the recent crisis, Americans focused on the fundamentals: food, safety and security. As a rational economist, I am still not sure how the run on toilet paper is explained, but I can understand the surge in demand for food staples and cleaning supplies. Not only are many of these products packaged in plastic, but some of the recently enacted bans on plastic bags and other single-use plastic items were also lifted, at least temporarily.
This sharp increase in demand for plastics packaging products coincided with a sharp decline in global demand for natural gas, crude oil and its distillates. This has allowed resin prices to remain at or near their cyclical low points. Materials prices represent a substantial portion of the production costs for packaging products, especially film and sheet. The combination of low materials costs combined with sharply rising demand has resulted in much higher profits for many manufacturers of packaging products.
To put this in perspective, the S&P 500 Index is up about 5 percent so far this year. Over the same period, the stock price for Berry Global, a publicly traded plastics packaging manufacturer, is up over 9 percent, and the stock price for Silgan Holdings, also a packaging manufacturer, is up by 20 percent. The charts for the stock prices of these packaging companies do not typically exhibit the high-flying growth patterns like one that might be seen in the tech or health care sectors. They are much more likely to grow at a rate that resembles other consumer staples stocks. But they have certainly overperformed during the shutdown.
As the above quote from Mr. Zweig indicates, such periods of extreme overperformance are most often followed by a period of underperformance. This means we should expect consumer demand for groceries — and plastics packaging products — to enter a period in which their growth rate underperforms the overall economy. This does not mean demand will fall off a cliff, but rather slows to a growth rate somewhat below its long-term average for a year or two.
For most Americans, this will be good news. It will mean the services sector of the economy, and all the people it employs, will see income trends revert back up to a solid growth rate. For packaging manufacturers, this means materials prices are also likely to rise as our intense national focus on food, safety and security subsides and we once again spend money on more energy-intense activities like travel. Demand for groceries and packaging will stabilize over the long run, but we should not expect it to grow at the rate we have experienced in 2020 for a long, long time.
'…regression to the mean is the most powerful law in financial physics: periods of above-average performance are inevitably followed by below-average returns…'
Jason Zweig
Author, Wall Street Journal columnist
On the graph I have charted a 12-month rate of growth curve and my forecast for next year for retail sales at grocery stores. This is a useful indicator for measuring overall demand for food packaging products, including many types of plastic film and sheet.