Perc Pineda, PhD, Chief Economist, PLASTICS
Today’s advance estimates of the third-quarter U.S. gross domestic product (GDP) reveal an economy exhibiting resilience, countering concerns about a potential contractionary phase in the business cycle. The 4.9% annual increase in GDP for the third quarter follows a 2.1% increase in the second quarter and a 2.2% increase in the first quarter.
Economic growth appears to be broad-based, with robust spending in both the household and business sectors. Overall household spending increased by 4.0%, with a 7.6% rise in durable goods consumption and a 3.3% increase in nondurable goods consumption. Business sector spending increased by 8.4%, although there was a specific decrease of 3.8% in business investment spending on equipment.
Exports of goods saw a 7.5% rise, in stark contrast to the 16.0% decrease in the second quarter. Imports also increased by 5.7%, up from the 7.6% decline in the previous quarter. As a result, net exports of goods and services increased by 6.2%, reversing the 9.3% decline in the second quarter.
Government spending also experienced an increase, rising by 4.6% in the third quarter, with national defense spending showing the most significant increase at 8.0%.
Weighing implications for the plastics industry
In September, at this year’s annual executive briefing of the Plastics Size & Impact Report, I was quoted by Plastics Today as saying that the “U.S. plastics industry slowdown has hit bottom.” The plastics industry is mature, and its growth closely tracks the economic growth as measured by GDP. The substantial increases in durable and nondurable goods consumption, which encompass many of the plastics industry’s end markets, reflect these positive developments.
However, today’s GDP figures, which clearly indicate room for the economy to maneuver, suggest that the U.S. economic adjustment to higher interest rates is taking longer than previously anticipated. Initial conditions matter when it comes to tightening monetary policy. The tightening of the Fed funds rate began when fiscal policy was expansionary. A higher interest rate environment, though, will eventually limit the economy’s expansion.
Economic concerns and borrowing challenges
While non-discretionary consumer spending remains stable, there are plastics end markets that could use some improvement. The plastics industry would benefit from a more robust housing market, which has been adversely affected by higher interest rates. Additionally, the plastics industry would benefit from increased automobile and light truck production and sales, which also typically thrives with lower interest rates.
While it’s good news that the economy continues to grow, it’s surprising to see the four-quarter-ahead sales revenue growth expectations from the business sector, as reported by the Federal Reserve Bank of Atlanta’s Survey of Business Uncertainty, continuing a downward trend. Clearly, there is still an anticipation of subdued economic conditions ahead.
Higher borrowing costs are being felt by small-cap companies, which rely more on the credit market than large-cap companies. The 5.0% yield of the U.S. 10-year Treasury, the highest since 2007, clearly conveys the message that U.S. government borrowing now comes at a higher cost. In October, the total U.S. public debt reached $33.6 trillion, up $2.4 trillion from the previous year.
Plastics’ path forward
In sum, the latest GDP figures reveal a resilient U.S. economy that has weathered uncertainties, with promising signs of growth across many sectors. While these are positives for most of the plastics industry supply chain, the industry faces challenges associated with an extended period of adjusting to higher interest rates. Improvements in key plastics end markets would be advantageous for the industry.