Is the long-lost — or at least hidden — business cycle in the U.S. economic data finally returning?
Some version of this question has vexed economists and market analysts and politicians for most of the past decade. Perhaps you have heard it expressed as, "Where are we in this cycle? Mid or late?"
To this day, there is a wide range of informed opinions on just where we are in the cycle, and I find it interesting that when these opinions are discussed they often require some knowledge of baseball in order to interpret them: "We are in the sixth — or third, or ninth, or even 10th — inning of this cycle."
I have no doubt that most people in the plastics industry enjoy a good baseball reference. But understanding just where we are in the cycle is how owners and executives in this business earn their livings and pay their workers.
Nevertheless, the always-challenging task of analyzing and forecasting the business cycle has been more difficult than usual in recent years. The Great Recession resulted in a staggering disruption to the U.S. economy, and it has taken much longer than anyone ever expected to recover. There are still some segments that have not recovered, and all of this has put some big wrinkles in the cycle patterns. But I am starting to think that just maybe the classic cyclical pattern in the manufacturing data is re-emerging.
The chart shows the 12-month rate-of-change graphs derived from the monthly new orders data for both durable goods and nondurable goods in the United States. I chose to include both graphs for a couple of reasons. First, the plastics industry has a substantial interest in both sectors. Durable goods categories include important end markets such as automotive, appliances, medical, electronics, machinery and building materials. Nondurables includes the end markets for most plastic packaging products.
The second reason is that the cyclical patterns of these sectors have historically varied in predictable ways. For instance, the durable goods graph is usually more volatile. The conventional wisdom has always been that durable goods are more expensive than nondurables. Another difference is that some durables are purchased as investments, rather than for consumption, and their purchase often requires financing. Therefore, these markets are highly sensitive to changes in both incomes and interest rates. Thus, the rate-of-change graph should be higher at the peaks and deeper at the troughs. This is easily seen during the last recession in 2009 and the first year of the recovery in 2010.
Nondurables are mostly consumer staples: energy, food and clothing. These categories are usually less sensitive to changes in incomes and interest rates. But the conventional wisdom did not hold during the cyclical trough in 2015, when interest rates were extremely low.