By Perc Pineda, PhD

Chief Economist

Retail sales in March reflected rising unemployment, which has negatively impacted household income. Based on advanced data from the U.S. Census Bureau, retail sales and food services dropped 8.7% in March - 6.2% lower than March last year. Consumer spending slowed dramatically in March as the country began dealing with the coronavirus pandemic. Clothing and clothing accessories sales fell the most by 50.5% in March, followed by furniture and home furnishings (-26.8%), and food services and drinking places where sales decreased 26.5%. As Americans stayed at home restaurants and bars saw a double-digit decrease in sales.

Sales of consumer essentials, which use substantial plastics products and plastics packaging, increased in March. Food and beverage stores saw a 25.6% increase in sales, with grocery store sales increasing by 26.9%. Healthcare and personal care store sales rose 4.3%. With the coronavirus shutdowns affecting travel and leisure activities, sporting goods, hobby, and musical instruments and bookstore sales fell 23.3%. Gasoline stations saw a 17.2% drop in sales.

The decline in furniture and home furnishing sales provides clues on home building and construction, which is a key plastics end market. Ten-year data ending February 2020 show a 0.9 correlation between furniture and home furnishings and new single-family home sales. While March home sales are still to be released later this month, leading indicators—housing starts and building permits—showed softness in the housing market. Based on the U.S. Census Bureau’s residential construction statistics for March, housing starts dropped 22.3% to a seasonally adjusted annual rate of 1.216 million units in March from a revised rate of 1.564 million in February. Compared to March 2019, housing starts rose by 1.4%.  Building permits decreased 6.8% in March but rose 5.0% from a year ago. Housing completions fell 6.1% and were 9.0% below March last year.

Another key plastics end market with disappointing March retail sales is motor vehicles and parts. Motor vehicles and parts sales fell 25.6% month-to-month and 23.7% year over year. It can be expected that retail sales in motor vehicles will remain weak until the upward trending unemployment rate starts to reverse.

Falling consumer confidence has been expected as coronavirus shutdowns went into effect. This has resulted in lower demand—particularly in nonessential consumer goods—and corresponding supply adjustments. Based on industrial production data from the Federal Reserve Board, total industrial production fell 5.4% in March and 5.5% from March last year as businesses cut down on operations. Manufacturing output decreased by 6.3% from February – a 6.6% decrease from a year ago. Lower production activities led to lower capacity utilization. The first quarter closed with total industry capacity utilization at 72.7% in March - down from 77.0% in February. Manufacturing capacity utilization was 70.3% in March lower than 75.0% in February. Plastics and rubber products output fell 7.1% in March – 6.7% lower than March last year. Capacity utilization in plastics and rubber products manufacturing fell to 70.8% from 76.3% in February.  

Consistent with the latest PLASTICS Quarterly forecast, recently released data for the first quarter confirms the broad-based economic slowdown that started in March. There is a substantial difference between the current and previous economic contractions. This time, government-mandated business shutdowns and shelter in place—to contain the spread of the coronavirus—directly impacted household consumption and business operations. During economic contraction, more businesses will be operating at their loss-minimization function until the economy turns around, which is expected to start gradually in the second half this year. As the economy reopens and the unemployment rate begins to decline, retail sales, residential construction, and industrial production activities will start to increase from their current lows.