As we hurriedly put the finishing touches on 2022 and prepare to sally forth into 2023, the burning question on everybody's mind is, "Recession or no recession next year?"
It is no secret that Jerome Powell and friends are aggressively attempting to temper consumer demand in a quest to quell inflation. But do they possess the skill — or luck — to pull the rate of inflation down to an acceptable level and also avoid a contraction in overall economic activity?
Nobody really knows the answer to this question, and that includes the Fed chair, but as of this moment I am prepared to believe they just might pull it off. However, if they do succeed in managing a soft landing for the pending downward leg of the business cycle, I believe they will do so just barely.
After carefully parsing the data, perusing the trends and repeatedly running the models, my official outlook for real GDP growth next year calls for 0 percent growth. That's right, the total amount of economic activity for all of next year, after adjusting for inflation, will be the same as the total for this year. I will put a margin for error on this forecast of plus or minus 1 percent. And if anyone has a more defensible forecast, I am all ears.
What does this mean for the U.S. plastics industry? The historic growth rate in U.S. output of plastics products usually correlates closely to the real growth rate for the overall economy. During the decade prior to the pandemic, the average annual rate of growth for the plastics industry ran at just above 2 percent per year, which is pretty close to the pace of growth in real GDP during the same period.
Unfortunately, this snug relationship between the two rates of growth has not been reliable the past two years. The real growth rate for GDP through the first three quarters of this year is between 2 percent and 2.5 percent when compared with the same period in 2021. But according to the data from the Federal Reserve Board, the pace of growth in the output of plastics products so far this year is over 4.5 percent. The chart shows total output for our industry has been well above trend all year.
I believe the recent diversion in these two trends is due to factors that will not be repeated in coming years. Therefore, my forecast for the plastics industry next year calls for a reversion back to the mean in the trend for the plastics data. In other words, I expect the stronger-than-trend growth in the output of plastics products this year will be followed by a weaker-than-trend growth rate next year. Thus, if the forecast for the overall economy calls for a gain of 0 percent, then the forecast for the plastics industry is also for 0 percent. And here again, the margin for error in my forecast is at least plus or minus 1 percent.
One of the dangers of putting out a forecast of little net change overall in the annual totals is that folks might be inclined to believe it will be a year of low volatility. That there will only be incremental changes in activity levels for most sectors over the course of the year.
That is not at all what I expect to happen. In fact, I expect that next year will be quite volatile for many segments of the economy and the plastics industry. It is quite likely that business conditions will vary widely between sectors, and conditions could also change rapidly from quarter to quarter. The totals at the end of next year may look like there was not much change from 2022, but during the year it could feel like we are on a roller-coaster. As examples of what I mean by this, I offer the recent activity for a couple of bellwether end markets for plastics products: residential construction and motor vehicle production.