By Perc Pineda, Ph.D.
Plastics Industry Association
Recession or not a recession? Call it what you want, but U.S. economic output, measured by gross domestic product (GDP), adjusted for inflation, decreased in the first half of 2022. In Q1 2022, the U.S. real GDP fell by 1.6%. Based on the advance estimate released today by the Bureau of Economic Analysis, the U.S. economy continued to contract in Q2 2022 – falling by 0.9%. What is the impact of the economic slowdown in the first half of 2022 on the plastics industry? Personal consumption expenditures (PCE) data can offer clues.
PCE is two-thirds of GDP. Despite negative real GDP growth in the first two quarters of 2022, PCE growth continued to increase. After a 1.8% increase in Q1, PCE increased again by 1.0% in Q2. Recognizing that at least 83.0% of plastic products end up classified as personal consumption, it can be assumed that the plastics industry’s revenue has not been affected by the economic contraction.
Considering that the plastics industry manufactures multiple products with multiple applications serving different end-markets, interestingly, the breakdown of PCE offers guideposts for the plastics industry. For instance, PCE in durable goods, e.g., automobiles,light trucks and appliances, fell by 2.6% in Q2 after a 5.9% increase in Q1. PCE in non-durable goods, however, decreased for the second consecutive quarter – starting with a 3.7% decrease in Q1 followed by a 5.5% decrease in Q2. PCE on services, however, increased 3.0% in Q1 and 4.1% in Q2.
What is the outlook?
The multiple products that the plastics industry produces, come with different production lead times. Hence, changes in the components of PCE in H1 2022 were already priced within the plastics industry revenue before that period. We should also consider that sluggish economic growth is expected ahead. The U.S. economy could potentially expand by 1.7% this year. PCE could still increase by 3.1%, however, PCE on durable goods could decrease by 0.5% and nondurable goods could increase by a modest 0.3% compared to last year. PCE on services is still expected to stay buoyant at 4.8%. As the economy continues to contract, expect the plastics industry’s revenue growth will decelerate. The plastics industry is mature, and its growth will track GDP growth.
Wanted: short-term solutions
The economic slowdown in H1 2022 reflects structural limits of our economy, residual effects of the pandemic, geopolitical developments abroad, and a fiscal stimulus that could have been less aggressive or targeted. Recognizing that the economy is facing challenges today, it could benefit from policies that generate positive short-term results. What could help the economy and the industry in the short term? Policies that increase the labor participation rate will increase the economy’s productivity. Reducing the regulatory burden on the manufacturing sector could reduce inflationary pressure’s. After all, regulatory and compliance costs increase the cost of business and are reflected in consumer prices. A proactive, not regressive, government stance on energy independence could also be a strong market signal and potentially encourage capital expenditures to support higher energy production. At least in the short term, this could prompt domestic energy production momentum. These are examples of policies that could signal to markets that these short-term economic issues are being addressed with short-term results in mind, and in turn, nudge longer-term perspective.