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Plastics Industry Growth Prospects Intact Amid Slower Q3 for US Economy

in Industry
Plastics industry growth prospects intact amid slower q3 for us economy
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The U.S. economy’s slowdown in the third quarter may have come as a surprise to many after stellar growth rates in the first and second quarters. Following a 6.7% increase in output in the second quarter, the 2.0% increase in the third quarter came in lower than forecast. At the close of the third quarter, the U.S. was roughly a $19.5 trillion economy and $904.4 billion larger than a year earlier.

One component of GDP that saw a significant slowdown was in personal consumption expenditures. Following a solid 12.0% increase in the second quarter, household consumption rose by a modest 1.6% in the third quarter.  The consumption of goods fell by 9.2%, but those of services increased by 7.9%. The disparity between goods and services consumption reflects an increase in consumer engagement in the services sector as the economy continues to emerge from the pandemic. While the consumption of nondurable goods rose by 2.6% in the third quarter – less than the 13.9% increase in the second quarter – durable goods consumption fell by 26.2%. The goods sector, however, continues to face supply chain issues. Strong demand amid low supply has been pushing prices higher. Consumer engagement, which has slowed in the third quarter, will continue if prices remain stubbornly high, particularly in durable goods where inventory has remained low.  Despite healthy balance sheets of the household sector, consumer confidence has declined from 72.8 in September to 71.7 in October fall further to 66.8 in November, based on the University of Michigan’s Index of Consumer Sentiment.

The economy’s nonresidential investment spending also slowed in the third quarter – increasing by a modest 1.8% following a 9.2% increase in the second quarter. Business investment spending in structures and equipment saw 7.3% and 3.2% decreases, respectively in the third quarter. Investment spending on intellectual property products, however, increased 12.2% in the third quarter – at a similar rate in the second quarter of 12.5%.

Residential fixed investment, which covers all private residential structures and residential equipment, decreased for two consecutive quarters. Following an 11.7% decrease in the second quarter, residential fixed investment fell 7.7% in the third quarter.           

Is the U.S. economy losing its growth momentum and beginning to slow to its long-run average growth rate of around 2.0%? The answer is no. For one the U.S. economy is still emerging from the pandemic and continues to experience an output gap. With a $19.5 trillion GDP compared to a $19.7 trillion potential GDP, one can argue that the output gap has narrowed, but has not closed. This means the U.S. economy continues to operate less than full capacity and has room to grow.

It appears that the economy paused in the third quarter, as consumers pulled back. The fourth quarter, however, opened with a positive note on consumption. The advance retail and food services sales in October rose 1.7% from September – a 16.3% from October last year. The plastics industry keeps its pulse in household consumption considering that in 2020, 83.5% of plastics containing goods and services went to personal consumption by households. That number is unlikely to change this year and next year. Barring policy missteps such as those leading to higher cost of energy, will impact the economy’s manufacturing sector—including plastics—and will be burdensome for consumers. In momento, the economy appears to remain in a growth path and so too will the plastics industry.

Growth in the plastics industry could be reflected in an increase in finished goods inventory. In September, plastics and rubber finished goods inventory at $12.7 billion is still less than the pre-pandemic peak of $13.3 billion in June 2019. Manufacturers’ work in process inventories in plastics and rubber, which has been increasing since the end of the COVID-19 recession.

Following a 10.4% decline in April 2020, it bounced back 13.0% in April 2021. However, year-on-year growth has slowed due to supply chain difficulties and a shortage of labor. In September, work in process inventories rose by 3.5%. While growth is in the offing for the plastics industry, it is not without challenges. Based on my estimates, the U.S. plastics industry will still have 5,700 positions  under the pre-pandemic level. The pandemic has prompted many workers to rethink their career opportunities, which included moving from one industry to another. There is also an intra-industry movement of labor. As shown in the accompanying graphic, the number of employees in plastic packaging materials manufacturing decreased by 3,700 from January to August this year. In the case of plastic bottle manufacturing, it increased from 51,500 in April 2020 to 58,700 in August.

Supply chain pains and labor shortages caused elevated prices and higher wages that consequently increased the costs of doing business – in all industries including plastics. Against the backdrop of an economy that is still expected to grow in 2022, the likelihood that these headwinds will start to diminish depends largely on the pace of recovery—the emergence from the pandemic—not only of the U.S. but of the global economy.

(Courtesy Plastics Industry Association)

Tags: Growth ProspectsPlastic IndustryQ3US Economy

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