Thu May 25, 2017

PERCspective on Inflation

The Bureau of Labor Statistics’ inflation figures for April show that the increase in the Consumer Price Index (CPI) could lead to rate hikes from the Federal Reserve later this year, but these increases should be modest and shouldn’t pose a threat to the plastics industry in the near-term.

The Consumer Price Index (CPI) inflation rate for all items (the headline figure) increased 0.2 percent in April on a seasonally adjusted basis according to the Bureau of Labor Statistics. This is a reversal from a 0.3 percent decline in March. Energy commodities rose 1.3 percent—also a turnaround from a 6.0 percent decrease in March. If we look at core inflation—all items less food and energy—it increased 0.1 percent in April. While the economy will continue to experience monthly gyrations in inflation, from a year ago, April headline inflation was 2.2 percent and core inflation was 1.9 percent.

By and large the U.S. economy is on a solid footing. Labor markets remain strong and prices are stable. Although we had lackluster advance estimate of the first quarter GDP growth, the output gap of our economy—the difference between potential and actual output—continues to narrow. Given the Federal Reserve’s dual mandate of maximizing employment and stabilizing prices, my sense is we will probably see two more Fed funds rate hikes this year assuming the economy remains on course. However, I expect that rate hikes will continue to be gradual and moderate and therefore will not have a dramatic impact on the borrowing costs of both business and household sectors and by extension will not negatively affect the plastics industry in the short- to medium-term.

PERCspective on Retail and Food Services Sales

Monthly retail and food services sales rose 0.4 percent in April – a 4.5 percent increase from April of last year. The businesses that are critical to the plastics industry experienced increases.  Sales at electronics and appliances stores, building materials and garden equipment and supplies dealers, and automotive and other motor vehicle dealers increased 1.3, 1.2, and 0.8 percent, respectively. From April of last year, sales at automotive and other motor vehicle and building materials and garden equipment and supplies dealers rose 4.7 and 9.3 percent, respectively. Retail sales at electronics and appliance stores also increased 0.7 percent from April 2016.

The trend of stronger online shopping compared to the traditional brick-and-mortar buying spree continues. Non-store retailers’ sales increased 1.4 percent in April or 3.9 percent year-on-year while general merchandise stores fell 0.5 percent in April and dropped 0.7 percent from a year ago. Department stores’ sales in particular, experienced only a modest monthly increase of 0.2 percent, but a 3.7% decrease year-on year.

Consumer confidence remains high. April retail sales was the second consecutive monthly increase after the transitory decline in February. As the economy approaches the summer months, expect retail sales to further improve, but product innovation will be key to keep consumers more engaged.  The net effect from higher retail sales on the plastics industry – throughout the supply chain – will only be positive.

PERCspective on Housing Market Data

The U.S. housing market data for April came in weaker than expected. Privately owned housing starts and new single-family home sales fell 2.6 and 11.4 percent, respectively, according to the U.S. Census Bureau.

From a year ago, housing starts grew 0.7 percent and new residential sales rose 0.5 percent. Although the number of home building permits declined 2.5 percent in March, it was 5.7 percent above April of last year.

Existing home sales were also soft in April – falling 2.3 percent – but 1.6 percent higher than a year ago, according to the National Association of Realtors. Last month’s numbers show muted monthly housing market activity and sluggish year-over-year improvement.

As the economy further improves, housing demand can be expected to stay healthy. There is ample room for the housing market to pick up pace, as mortgage rates have only risen moderately.

Housing starts fell in the Northeast and South regions by 37.3 and 9.1 percent, respectively, but rose 41.1 percent in the Midwest and 5.4 percent in the West. Privately owned housing units authorized by building permits decreased the most in the Northeast (10.3 percent), followed by the South (7.4 percent). The issuance of housing permits the Midwest and West regions rose 1.0 and 8.7 percent, respectively.

While there is little evidence suggesting that housing market will stay soft in May and the summer months, tepid housing market growth has been largely due to low inventory. If this continues, it will exert further upward pressure on home prices.

What does this data mean for plastics? An increase in new residential construction will boost the housing market – increasing home ownership rate in the U.S. from its current lows – and will boost business activity in the plastics industry.

PERCspective on U.S. Industrial Production and Capacity Utilization

The latest statistical release on industrial production and capacity utilization from the Federal Reserve shows that U.S. industrial production rose 1.0 percent in April. From a year ago, industrial production advanced 2.2 percent. Industrial production increased for the third consecutive month after a steady decline since November 2014, due to downturns in the energy sector and strong U.S. dollar.

Total industry capacity utilization, which is a measure of the amount of slack in the economy, was 76.7 percent in April. It was marginally higher than 76.1 percent in March, but below the long-run average of 79.9 percent. This suggests that there is room for the U.S. economy to maneuver as it continues on an expansionary path.

Plastics (and rubber products) manufacturing output increased 0.9 percent in April after falling 2.6 percent in March. Capacity utilization for plastics (and rubber products) rose marginally – from 80.0 percent in March to 80.6 percent in April.

Computer and medical equipment production rose 0.11 percent and 2.1 percent, respectively in April. Automotive products output rose 5.1 percent in April, showing a 4.7 percent increase from April last year. Total motor vehicle assemblies expanded from 11.20 million units in March to 11.93 in April. Although it is a 6.5 percent increase from March, total motor vehicle assemblies in April were below the 2016 monthly average of 12.18 million units.

What does this data mean for plastics? Overall, the outputs of industries that are critical to plastics manufacturing were positive in April, and if it continues to expand will sustain plastics manufacturing growth this year.