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December 17, 2019 09:17 AM

Plastics to grow, but underperform overall US economy, in 2020

Bill Wood
Economics Editor
Plastics News Economics Editor
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    Wood

    My outlook for the North American plastics industry in 2020 is mixed. Some major industry sectors will experience moderate declines in end market demand for plastics products, while others will enjoy moderate increases in market demand.

    For the industry as a whole, my forecast calls for a gain of 1 percent in total U.S. production of plastics products in 2020. I expect the trend next year to exhibit flat to modest growth during the first two quarters followed by a moderate acceleration in the second half of next year. I have plotted my forecast on the chart. It should be noted this data series does not include output of resins and other related materials.

    There has been some debate recently about whether the plastics industry and the overall manufacturing sector are currently in a recession. Based on this chart, as well as other manufacturing data, it is clear to me we have been in a phase of moderate contraction for the past year. Whether you call it a period of recession, consolidation or contraction is a matter of personal taste. But it is clear the domestic plastics industry is not growing at the same pace as the overall economy.

    I expect the industry to register positive growth next year, but we will still lag the overall economy. This gradual upward trend in output should provide only a moderate lift to the overall capacity utilization rate for the plastics industry. Most processors should be able to meet the expected increase in demand with existing capacity already in place, which means that equipment suppliers will continue to focus on upgrades and replacement demand rather than expansions.

    My forecast is primarily based on the continuation of some well-established market trends that are currently affecting demand for plastics products.

    On the positive side, the U.S. economy will continue to expand in 2020. The longest period of economic recovery in our lifetimes will get even longer. And not only are we going to avoid a recession next year, but we are not going to be at the end of the cycle. Many people want to believe that a recovery this old must be near the end. That means the next recession, when it ultimately happens, will be the most anticipated recession of all time — for those of you interested in the economics record book. But as of now, this economy is not winding down; it is recharging.

    The current recovery has been so gradual I am prepared to believe it could go on indefinitely. There are no signs of inflation, so there is no need to raise interest rates from their current low levels. The economy keeps creating a steady stream of jobs, and these jobs are gradually getting filled by the available pool of labor. Thus, wage gains have been gradual and manageable. Many small business owners still plan to hire more workers, if they can find them. This does not describe the end of a cycle.

    The segments of the economy that will benefit next year from these trends include residential construction and real estate, lawn and garden equipment, home electronics and appliances, and most types of recreational and entertainment products and services. Builders and contractors will continue to struggle to find skilled laborers, and this will impede growth in demand for construction materials. But the number of new household formations will continue to rise, and this will keep a solid floor under demand for new houses, home renovations and many types of household products.

    Slumping auto sector

    The most significant industry, from a plastics perspective, which is not expected to enjoy an increase in demand next year, is the auto sector. My forecast calls for a moderate decline in U.S. motor vehicle demand. Americans will still purchase a large number of new and expensive autos, but not as many as they purchased this year. The industry is currently in a cyclical low phase for new product launches. The result will be modest downward pressure on demand for new plastics parts over the next few quarters.

    Downward pressure for plastics products is also the result of the flagging public perception of the plastics industry. We have witnessed how this affects the markets for plastics packaging and single-use products, but even companies like General Motors are feeling the heat. There is no data measuring the precise impact of this situation, but my sense is that it is gaining momentum and will get worse before it gets better.

    In my opinion, the combination of slower demand from the motor vehicles segment and market deselection of many packaging and other sundry plastics products will not be enough to push the total industrial output negative next year. But it does mean the plastics industry will continue to underperform the overall economy. I expect growth in real U.S. GDP to come close to its long-term rate of 2 percent in 2020; however, I expect the gain in plastics production to be 1 percent.

    Since it is the end of the year, I will offer a few words about a couple of the long-term issues vexing the market.

    First, America's issues with China took 20 years to create, and they will not be fixed in just one year by a trade deal. If you think more soybeans are the answer, then you are not asking the right question. We boomers had Russia for a boogeyman. Succeeding generations will struggle with China. Ultimately, I believe the threats to global economic freedom and stability currently posed by the Chinese government will diminish on their own, as long as we don't continue to prop them up like we inadvertently did after 2001. But it will take a generation or two.

    Second, the plastics industry is a large part of the global environmental solution for sustainability. Our species has a huge blind spot when it comes to accounting for our personal and industrial waste. I am optimistic we can correct this anthropocentric deficiency, and plastics products will play a large role in making this happen. This problem should not take as long as the China problem to solve, but those of us who derive our livelihoods from this industry cannot wait any longer to dedicate ourselves to turning this issue around.

    Here's wishing you a healthy holiday season and a prosperous new year.

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