COVID-19, the Fed funds rate, and the U.S. Plastics Industry

March 17, 2020

“Is the economy experiencing a financial meltdown necessitating drastic action from the Fed? The answer is a resounding no – the U.S. is not in a financial crisis. However, central banks around the world reacted proactively to ensure that liquidity in the financial markets is not compromised as economic activity slows due to the coronavirus (COVID-19).”

By Perc Pineda, PhD

PLASTICS Chief Economist

The Federal Open Market Committee’s emergency meeting on Sunday, which resulted in cutting the Fed funds interest rates to 0-0.25%, undoubtedly is causing concern if the U.S. economy is heading into a slowdown similar to the financial crisis, more commonly known as the Great Recession, that began in December 2007 and ended in June 2009. Is the economy experiencing a financial meltdown necessitating drastic action from the Fed? The answer is a resounding no – the U.S. is not in a financial crisis. However, central banks around the world reacted proactively to ensure that liquidity in the financial markets is not compromised as economic activity slows due to the coronavirus (COVID-19). It should be noted that monetary policy works with a lag, hence monetary policy actions needed to be taken sooner than later as the pandemic is rapidly spreading across borders causing deaths in 28 countries.

The coronavirus pandemic was first reported on December 31, 2019 in Wuhan, in the Hubei province of China. Considering the significant role China plays in the manufacturing supply chain, COVID-19 not only disrupted China’s economy but also the global economy. The initial effect on the U.S. economy was in the form of a negative external supply shock. China plays a role in the U.S. plastics industry supply chain and the U.S. manufacturing sector. The U.S. general imports (including all goods that physically arrive into a U.S. port or customs district for processing) of plastics and articles thereof broadly classified under HTS 39 from China were 31.0% of U.S. plastics imports. With factory closures in China, it is expected that cargo shipments to the U.S. were disrupted. According to the American Association of Port Authorities, cargo volumes at many U.S. ports during the first quarter may be down 20% compared to 2019.[1] Bloomberg News reported that cargo volume fell 23% in February at the Port of Los Angeles due to coronavirus fallout.[2] The Journal of Commerce Cargo expects a late April import surge. If spring and summer merchandise shipments were disrupted by factory closures in China, which are now merged with back-to-school shipments that normally starts in late April, cargo delays are highly probable.[3]

In addition to COVID-19’s effects on the supply side of the global economy, countries are taking measures to contain the virus—affecting the demand side. Demand for plastics, particularly single-use plastic products in the healthcare sector is expected to remain robust as hospitals respond to the health crisis. However, necessary actions to stem the spread of COVID-19 need to be taken. Travel bans, event cancellations, teleworking, school closures, etc. are necessary social distancing measures to contain COVID-19. These precautionary and containment actions have unavoidable consequences on the economy.

To put it in perspective, travel bans impact the air, rail, and transit and ground passenger transportation—which are 0.7%, 0.2%, and 0.2% of U.S. gross domestic product (GDP), respectively based on 2018 GDP estimates. It also affects the travel industry’s supply chain. Oil prices decreased due to anticipation of weaker demand. On March 6, 2020, the WTI was down to $41.14/barrel from the $61.17/barrel on January 2, 2020. At the time this article was written (March 16), the WTI prices were $28.98/barrel. Natural gas fell to $1.8/million BTUs today—from $2.2/million BTUs on January 2, 2020. Arts, entertainment, recreation, accommodation, and food services were 4.2% of U.S. GDP in 2018. Cancellation of sporting or entertainment events generates zero demand for plastics products. Consumers staying away from food services and drinking places, which were 2.2% of the U.S. GDP, will also affect demand for plastics products. While these numbers are on the low side as a percentage of GDP, their spillover effect into other products and services will further slow economic activity.

All told, supply disruptions and demand weaknesses will affect economic activity, but both supply and demand shock to the U.S. and global economy are transitory—including the marked volatility in the financial markets. Last year, uncertainty from tariffs and trade caused business investment spending to decline. Today it’s different in that both household and business sectors are faced with fear and uncertainty. The Federal Reserve and other central banks around the world took actions to limit the negative impact of credit tightening and rising financial costs. Since the U.S. economy was off to a good start—strong labor markets, increasing personal income, and healthy consumer spending—the negative effects of these shocks will not be reflected in the first-quarter economic data. The Federal Reserve Bank of Atlanta’s GDP, now a model estimate for real GDP growth (seasonally adjusted annual rate), in 2020-Q1, is 2.9% on March 17, lower from 3.1% on March 6. It is the second quarter data that is questionable—how much of a drag COVID-19 will be on this year’s GDP hinges upon the speed of containment and resolution. If we look back to the financial crisis, real personal consumption expenditures in the U.S. decreased by 0.2% in 2008 and 1.3% in 2009. While the U.S. economy is not in a financial crisis today, it can be expected, however, that global economic growth in 2020 could be lower than 2019 – and will impact the U.S. economy.

This year opened with the value of manufacturers’ shipments of plastics and rubber products at $19.9 billion, according to U.S. Census Bureau data. The ratio of manufacturers’ total inventories to shipments of plastics and rubber products has been stable at 1.35 for the last three months, ending January 2020. The value of manufacturers’ inventories by stage of production as of January has been lower than last year. Except for work in progress inventories that increased 3.7% in January from December, materials and supplies and finished goods inventories were marginally lower. The plastics industry’s February -0.3% and March data are expected to come in lower than the previous months. Supply and demand gaps could surface if manufacturing activity is reduced markedly or halted for an extended amount of time. The demand for plastics and plastics products in household essentials, healthcare, and medical goods and supplies space is not expected to decrease dramatically. The retail distribution for these types of products through online delivery can be expected to increase.

The recent developments surrounding COVID-19 and its impact on the macroeconomy and the plastics industry will be reflected in the forthcoming Plastics Quarterly to be released in the first week in April.

[1] American Association of Port Authorities (February 28, 2020).

[2] Sasso, Michael. Warning Bells Sound for U.S. Economy as Virus Squeeze Ports. Bloomberg Wire Service: New York, NY

  (March 11, 2020).

[3] Mongelluzzo, Bill. US Forwarders, Shippers Prep for Late April Import Surge. Journal of Commerce: New York, NY

  (March 9, 2020).