Retail sales data shows promising potential for plastics

According to the latest data from the Census Bureau, the recession in the retail sector of the U.S. economy is over. Let that sink in a minute. Now I know the retail sector is not the entire economy, so there is still more work to do. But it large and significant, and it also affects a huge piece of the plastics industry.

Here is a rundown of the numbers. Total retail sales for July posted a gain of greater than 1 percent when compared with the June tally, and aggregate receipts escalated almost 3 percent when compared with July of last year. For those of you who are really keeping score, total retail sales in July were also up more than 1.5 percent on a seasonally adjusted basis from the February total, which was the last month before we were all rudely awakened to the arrival of COVID-19 in this country.

I find this remarkable because many states are still in some version of an economic shutdown, the national unemployment rate is in double digits, and consumer confidence levels are best described as subdued. All of this notwithstanding, total retail sales expanded by more than 2 percent this summer when compared with last year.

To be fair, I should point out there are other sectors of the U.S. economy that remain mired in recession. The retail sales data is composed mainly of establishments that sell goods rather than services, and the recovery in the service sector is still at least a few months away. And there can be no doubt this rise in retail activity was fueled by the vast amount of fiscal stimulus injected into the economy in the second quarter.

But those stories are already well known. I think the most interesting stories that are newly emerging in the data this quarter are the wide divergences in the recovery rates among the various segments of the retail sector.

I have charted the 12-month rates of growth for a few of the major retail segments. At first glance, this chart looks like a tangle of spaghetti, but I encourage you to pause a few minutes and take a closer look. Not only are there some unusual trends in recent months, but there are also some wide discrepancies in how these sectors have performed recently when compared with how they performed the last time there was a severe economic recession just over 10 years ago.

And as you ponder the recent patterns in this chart, take a moment to consider what these trends indicate about the most probable future economic conditions. For instance, do they reflect permanent shifts in how retail trade will be conducted as we collectively move forward in time, or are they one-time blips that will revert back to the mean as the risks from COVID-19 begin to subside. This is what I mean when I talk about interesting stories.

It will come as no surprise that online retailers are reaping the largest benefit from the pandemic. This segment has a shot up at an annual growth rate of 20 percent this year, and this comes on top of the fact that this was already the fastest-growing segment of the past decade. Clearly, this segment will continue to grow at a strong pace for the foreseeable future. It will not sustain a pace of 20 percent per year, but it will continue to displace many brick-and-mortar establishments in the coming years.

The next biggest winner so far this year is a surprise to me. A few months ago, if you had told me grocery store receipts would rise by nearly 10 percent in 2020, then I would have assumed your forecast for the rate of inflation for this year was close to 9 percent. This is the most stable data segment there is, and the gain this year will be a huge outlier. I have no doubt this series will eventually revert back to the mean, but not before many manufacturers of consumer staples, along with the plastics processors that supply them with packaging products, rake in some nifty profits this year.

Establishments purveying building materials and garden equipment and supplies are also having a good year, as are the manufacturers of plastic building materials. This is not a segment that typically fares well during recessions, and this sector was particularly hard hit after the housing bubble burst prior to the previous recession. But residential construction activity is booming — the July total for new housing starts was the strongest in 14 years. And any time it is a good time to build a new house; it is also a good time to renovate or repair an existing one.

Given the recent spike in sales of building materials and also the surge in people working from home, I am surprised by the sharp decline in sales at electronics and appliance stores. And now that I have seen the data, I do not expect this segment to bounce back. These stores are casualties of the sharp increase in spending at both online retailers and also warehouse clubs and supercenters. The good news for suppliers of plastics products to the electronics and appliances industries is that the production of many of these types of goods may be repatriated to the U.S. in an effort to eliminate the risks associated with long supply chains and geopolitical uncertainty.

The remaining graph represents receipts at restaurants and bars. This sector is not behaving as if we are recovering from an economic recession, but rather like we are trying to recover from a natural disaster. The trend in this dataset is typically stable, and I expect it to revert back to more normal levels in the coming years.

I will mention here that I expect the rate of growth graphs for all of these series to reverse direction next year as data, which is currently in the numerator of the rate of change calculation, goes down into the denominator. Forecasting the magnitude and the timing of these reversals will keep analysts like me busy over the next year.

I should also mention I intentionally omitted the data for sales at dealers of motor vehicles and parts, and the trend for this sector has been quite encouraging during the past couple of months. Obviously, this is a large and important end market for the plastics industry, and I intend to devote an entire column to the trends and forecast for this segment in the near future.