Perc Pineda, Ph.D.
Chief Economist, PLASTICS
While the first six months of 2022 brought economic contraction causing production to move sideways from February to June, U.S. plastics product manufacturing advanced to a good second-half start. The 1.2% increase in plastic production exhibited in July was an improvement—6.3% higher than a year earlier and higher than the 3.2% increase in U.S. total manufacturing.
Based on unemployment data released earlier this month which unveiled a plastics and rubber product manufacturing unemployment rate of 3.0% in July (down from from 4.5% in June), the likelihood of a plastic production increase in July was high. And the latest estimate from the Federal Reserve confirms that uptick in production. When we consider that most economists expect anemic output growth this year—including a more convincing sign of a recession in the near term—what is the likelihood that this July data point is the start of an upward trend?
Plastics track overall economic growth
The plastics industry is a mature industry, meaning, its growth will track overall economic growth measured by gross domestic product (GDP). The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters shows that the median real GDP growth forecast is 1.6% for 2022 and for 1.3 % for 2023 Based on these macro projections, it is unlikely that plastic production will continue to increase linearly in the coming months. Growth rates in production will vary, upward and downward, in the coming months when we consider the different dynamics of plastics end markets.
Personal spending affects plastics production
Two-thirds of GDP is personal consumption expenditures (PCE) and in previous economic slowdowns, the household sector kept the economy chugging along. The level of engagement of the household sector offers clues to the path of plastics production. For example, retail sales flattened in July. The PCE rose at a lower rate of 1.0% in Q2 of 2022 compared to 1.8% in Q1. The PCE on goods fell by 4.4% and PCE on services rose by 4.1%. The University of Michigan’s consumer sentiment index of 55.1 for August is up 7.0% from July but down 21.6% from August of last year. Consumers continue to cope with persistently high inflation, which could cap higher PCE growth rates moving forward.
The construction sector is an important factor
Additionally, rising mortgage rates have caused a slowdown in home sales. As home construction slows—in response to home-buying pullback in the economy—plastics demand in the homebuilding industry will also slow. Housing starts, which measure the number of privately owned new-home groundbreakings, fell by 9.0% in July from just a month before and is currently down by 8.1% from June of 2021. Looking ahead, it would be misleading to attribute volatile plastics production to a specific end-market. In the past, changes in plastics production were not independent of the nature of the economic slowdown.
The “why” behind recession matters
The most recent COVID-19 recession was a medical and healthcare crisis that boosted the demand for plastics and plastics products in the healthcare industry—from personal protective equipment, to life-saving disposable medical supplies, to medical equipment—and the addition of consumer goods packaging. While the pandemic slowed business activities in the services sector, the manufacturing sector continued to respond to robust demand for consumer goods.
The largest decrease in plastics production during the COVID-19 recession was in April 2020. Production fell 11.2% from the previous month and fell 11.9% from April of 2019. The decrease was due to a pullback in production due to mandated lockdowns, not a decrease in plastics demand. In contrast, during the Great Recession of 2007-2009, which was a combination of housing, financial, and automotive industry crises, plastic products manufacturing decreased the largest during the month of December 2008 by 4.1%—a 17.4% decrease from a year earlier—and continued to slide, so much so that by March 2008 production was down 21.0% year-on-year.
While the outlook for plastics production in 2022 is still positive, stronger micro and macroeconomic headwinds can be expected as U.S. and global economic outputs slow.