Sticking to the baseline: Extremely average growth on the horizon

I have recently become fascinated by the mysterious blue tent on the sidelines of NFL games. If you watch football, you probably know this newfangled tent is where players who are suspected of having a concussion are taken to have the NFL's concussion protocol administered. For those of you not familiar with this process, I will offer an oversimplified explanation.

The player goes into a dark room (or tent) and is given a test on a computer designed to measure his cognitive abilities at that moment. Concussions measurably impair one's cognitive abilities in the short term, so a player cannot return to action until the speed and accuracy of his answers on this test return to "baseline" status. In order to establish a baseline, every player has to take a similar test before the season starts.

The reason for my fascination with the concussion protocol is that this process is starting to remind me of the way I have started to analyze and forecast the performance of the U.S. economy and the plastics industry. During the past decade, we have certainly established a baseline for the vital economic and manufacturing sector indicators. And now when something happens that might cause either a slowdown or an acceleration in the economy, I have started to look to see how much the indicators are deviating from this baseline.

For the past few months, I have touted the notion that the overall performances of both the U.S. economy and the plastics industry in 2020 will mainly depend on the behavior of the American consumer. This is not a revolutionary idea. Consumers account for roughly 70 percent of total U.S. GDP, and they also purchase most of the plastics products manufactured in this country.

Two of the most important trends that illuminate and anticipate U.S. consumer behavior are the rates of growth in the monthly data series measuring consumer spending and personal income. At the present time, both of these series are performing absolutely, incredibly, magnificently … steady. For the past year, they have been pinned right on their long-term baselines.

On the chart, I show the three-month rate of change graphs derived from these data series since the end of the Great Recession in 2009. Keep in mind this chart measures the rate of growth in these data, not the actual levels. So if the curve is above the zero-line, then the three-month growth rate in the data is positive when compared with the same three-month period of the previous year.

According to the chart, the growth rate for total consumer spending has stayed close to the 4 percent line for the past 10 years. From a historical perspective, this pattern is unusual because it is relatively flat rather than cyclical. Growth jumped up to the 6 percent level in 2018, due primarily to the tax cuts implemented that year, but then settled back to the 4 percent line for all of 2019. It is interesting to note that the 10-year average growth rate is exactly 4 percent. That's what you call a solid baseline.

The pattern in the data for personal income was a little more volatile during the past decade, but here again the baseline was pretty stable by historical standards. The 10-year average for growth in this series is 4.4 percent, and it averaged just a bit higher than that in 2019.

I find it particularly gratifying that the long-term average rate in income is moderately higher than the average growth in spending. We all want to make more money, and many of us also would like to spend more, but it is important for the long-term health of the economy that we collectively stay within our means. That is the best way to prevent severe recessions.

You should note these data series are not adjusted for inflation. If you estimate that inflation was a bit below 2 percent for the past 10 years and then factor this into the data, you come up with spending growth of just above 2 percent and income growth of roughly 2.5 percent. These figures correspond nicely with the 10-year average in real GDP growth in the U.S. of just about 2 percent.

When I combine the consistent 10-year performances in this data with the extremely average performance from last year, I derive a forecast for the U.S. economy and the plastics industry in 2020 that comes in right around the baseline …again. Income growth has started to creep up, and I hope this continues. But the inflation data is also starting to drift upward, so at the moment I am not forecasting much change in the overall growth rate for real spending.

It is impossible to predict what it will take to push these graphs away from their baselines. We have recently experienced some events that some predicted would give us the economic equivalent of a concussion. These include the impeachment of the president, tariffs on imports of Chinese goods and, just in the past few days, the killing of a major Iranian military leader.

But so far, I have yet to see any meaningful decline in the baseline performance. There is always a lag in the data, so it is still possible the combination of these or some other events may pull the data down this year. But we must also remember that not all surprises are bad. There is also the chance some currently unknown event just over the horizon will push this data higher. For instance, who predicted the stock market would gain 30 percent last year?