Turning points in business and economic cycles do not always coincide with changes in the calendar year, but for my first column in 2023 I will suggest that the U.S. economy is currently at a significant turning point.
I must start with a caveat. This does not mean the economic environment will now start to improve. To the contrary, I am quite confident the economic environment will experience strong headwinds during the next few months. The good news is that the recent spate of interest rate hikes by the Fed are starting to have their desired effect of lowering the rate of inflation in the United States.
As of the December reading, the headline figure for the Consumer Price Index came in lower on a month-to-month basis for the second consecutive month. By now we all know there are multiple ways of measuring, slicing, dicing, adjusting and interpreting the data on inflation. And we have also learned that two months' worth of good news is not a guarantee of a sustained, long-term trend, so there is still a danger of a return to the upside. And we have further learned that the year-over-year rate of inflation is still too high. Now that I think about it, we have learned a lot about inflation in the past year.
But all long-term trends start off as short-term trends, and like I said, I believe the economy is currently at a significant turning point. I am not sure how long the data will continue to register month-over-month declines, but the trajectory in the data on the prices paid for goods will flatten out this year, and for many types of goods, the trend will actually be noticeably lower (aka deflation).
The prices paid for services will not trend lower this year. Prices for services are strongly affected either by trends in the cost of housing, or the costs associated with wages and benefits. The rate of increase in these costs will likely decelerate, but they will probably not decline this year.
For manufacturers in the plastics industry, this means the prices paid for materials and other products may decline when compared with last year. It also means the prices they receive for the products they make may decline as well. The ability to pass costs through will be much more difficult than it was a year ago. The costs stemming from wages and benefits will not decline.
When you put it all together, it works out like this: The rate of change in total revenues for plastics companies will decelerate at a faster pace than the rate of change in total costs. In other words, profit margins will be compressed. That is what I mean by strong headwinds in the economic environment.
The rate of inflation in the overall economy will steadily progress toward the target level of 2 percent per year as 2023 progresses, but we will have to endure a period of short-term pain before we return to a sustainable level of strong economic fitness. Profits for all industry segments will decline, and it is highly likely some segments of the plastics industry may even go into a period of recession.