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May 11, 2020 07:00 AM

The US economy will restart, but how fast?

Bill Wood
Economics Editor
Plastics News Economics Editor
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    Ford Motr Co.
    Ford Motor Co. installed barriers, signage and other safety measures to its European operations before restarting production.

    "Any sufficiently advanced technology is indistinguishable from magic."

    Arthur C. Clarke

    I specifically remember thinking of this quote the first time I attended an NPE. The array of machines making things out of plastic was magical to me, especially the blown film tower. I was mesmerized watching the bubble at the bottom, the flow up and down the tower, and a precisely timed winder downstream. My first question was, "How do you get this thing started?"

    This is the same question I have incessantly asked myself the past few days. We are all eagerly anticipating the restart of the U.S. economy, yet I suspect it is going to be much more complicated and will require much more collective expertise than getting a blown film line installed and running. Nevertheless, I have no doubt it will happen. There will be glitches in the beginning, but there will be something magical about it as well. After all, what we are about to witness has never been seen before.

    There is a lot of speculation about the timing and the shape of the pending recovery. Or to be more specific, what shape the curve will take as the economic data is charted in the coming months. Some prognostications describe the curve shape as a letter of the alphabet: V-shaped, U-shaped, L-shaped, W-shaped, etc. Each of these shapes imply something different about the timing and strength of the next recovery phase.

    To be honest, these shapes are really just guesses rather than forecasts. There is no clear consensus among economists and analysts and policymakers about which of these shapes is the most probable. I doubt if they are all equally probable, but at this time I cannot rule any of them out.

    I will add another shape for your consideration. If I had to give it a letter designation, I would call it something like a "modified V-shape," or maybe a "V-shape that morphs into a U-shape." It is the shape the plastics industry traced during the recovery from the Great Recession that ended in 2009.

    As you see on the chart, the plastics industry data rebounded quickly off of the low point in the first half of 2009, and the trajectory was sharply higher for about a year. This was definitely a V-shape. But then it dipped modestly for a year or so before continuing back upward on a more gradual slope. So after the initial V-shape, we entered into more of a U-shape, which then continued for the next seven years.

    I am not confident enough at this time to call this an official forecast for the coming recovery. I just want to offer it for your consideration. But it would not surprise me in the least if this is how it goes.

    The initial V-shape that started the last recovery was caused by the release of pent-up demand combined with the fact that the last few months of the recession was marked by overreaction or even irrational panic. This is often the way recessions end. At this point, the market runs out of motivated sellers and savvy bottom-feeders start to sweep up the obvious bargains. This is the natural cyclical progression of both ecology and economics, and it is a signal the recovery has started.

    So just about a year after the recovery started in 2009, and once all of the pent-up demand in the economy caused by the overreaction was spent, there was a short period of rebalancing in the plastics industry. On the chart, this is represented by the period from roughly 2010 through 2011. By the end of 2011, the recovery was more than two years old, and the widespread fear of another sudden decline had dissipated. The bulk of the more cautious, long-term investors started to get serious about reengaging the market, and that started the U.S. economy and the plastics industry on a longer upward phase that was more gradual and more sustainable.

    Some of the conditions that were present at the end of the previous recession are emerging now. There is a lot of pent-up demand, and the current level of response to the risks posed by the virus is approaching overreaction in some segments of the population and in certain sections of the country. Don't get me wrong, an extreme reaction was required a couple of months ago in order to "flatten the curve" and save lives. Americans responded magnificently. This is especially true of some Americans who just happen to manufacture things out of plastic.

    But it is now time to dial back the level of crisis response and prepare for rebuilding the economy. We are not yet completely out of danger, but neither are we surprised and ill-prepared. I am not sure of the exact month for the next low point on the chart. And I do not know if we can get a V-shaped recovery started in the coming weeks, or if we do get one started, how long it will last. I will take any curve that goes "up and to the right." Regardless of the shape of the curve, the only way forward is to focus on the recovery and readjust to life in a way that effectively manages the known risks.

    America has paid a hefty price in both lives and livelihoods fighting this pandemic, but we will soon win the battle. I do not yet have an economic forecast ready to publish, but I will share some of what I have learned over the past few months. A wise economist once advised, "Make sure to learn the lesson — you paid for it."

    First, there are a lot of magicians working in the U.S. plastics industry and the manufacturing sector. Our public image has taken a few lumps in recent years, but you have done yourselves proud in the fight against the coronavirus.

    Second, the scientists and pharmaceutical companies lined up against this disease are more than magical, they are miraculous. Their industry has also been subjected to criticism recently. But never doubt for a moment that it was our free market system that directly or indirectly funded the vast resources of research, advanced technology and infrastructure that will ultimately defeat this virus.

    And finally, as Warren Buffet recently reminded us, never bet against the USA.

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