I contributed an article to the Winter 2010 issue of Plastics Business in which I reviewed the growth of the major
plastics industry markets from 2004 through 2009 and then speculated as to likely developments out to 2014.
Normally, there are few second chances in life. However, I’ve been offered the opportunity to revisit that article,
update developments through 2010 and rub the crystal ball once again.
The prevailing expectation (hope) one year ago was that the U.S. economy, having reached the nadir of the “Great
Recession” in June 2009, would experience either a V-shaped or U-shaped recovery. The economy actually did begin to
recover in the second half of 2009, and this pattern continued into 2010. However, the pace of recovery has been so
lethargic that it engendered fears it would ultimately be W-shaped (i.e., the dreaded double-dip recession). Today
there are many economists (the author of this piece included) who anticipate continuing challenges to get back to
the levels of household income, household consumption, capital investment, employment and unemployment obtained at
mid-decade.
First, let’s examine the actual trend of growth of U.S. real GDP over the period covering the recession and
subsequent recovery. We observe in the graph below that the downturn in this key measure of economic health began
in Q1 2008, continued through Q2 2009 and then recovery ensued from Q3 2009 up through Q3 2010. Whereas the
cumulative loss of output over four quarters was 4.1 percent, the cumulative recovery over five quarters has only
been 3.6 percent. It will probably take six quarters (through Q4 2010) for U.S. GDP to fully recover lost output
from the recession.
To put the pace of the current recovery in perspective, the U.S. economy has experienced only three other episodes
of three consecutive quarters of decline in real GDP since WW II. In all three cases, real GDP recovered more than
the lost output over the subsequent three quarters.
There are several factors contributing to the unfolding weak recovery in our economy. On the one hand, this latest
recession was unique insofar as it was the culmination of several asset bubbles bursting sequentially – the dot/com
crash of 2000, the housing collapse of 2005/2006 and the global financial crisis of 2008-2009. Rebounding from
financial crises historically takes longer than periodic downturns in the business cycle. On the other hand, it
also was unique insofar as this was a synchronous global recession with few countries and regions spared its
corrosive effects.
Much of the blame can be attributed to the inappropriate and ultimately ineffectual fiscal and monetary policies
adopted since the onset of the recession. The bailouts of the banks, insurance companies, car companies and others
only served to preserve the status quo rather than spurring fundamental reform. The stimulus program of early 2009
preserved other elements of the status quo (e.g., bloated state and local government budgets). The mortgage
modification program failed, and it prevented the housing market reaching a market-driven bottom from which it
could rebound. The new stimulus program negotiated between the president and the Republican leadership in December
is another effort to preserve the status quo (e.g., income tax rates) rather than forcing everyone, regardless of
income, to sacrifice in order to lower the ballooning national debt. The reduction in employees’ social security
payments will have to be financed by borrowing, which will further impede recovery. The Deficit Commission’s call
to address the nation’s broken balance sheet has been put off for yet another day.
The dilemma we confront as a nation is that we need to reform many of our basic institutions in order to compete in
a rapidly globalizing economy. Yet in the short term, the length and depth of this recent recession, along with the
anemic pace of recovery, has made both consumers and producers more cautious, more uncertain, more risk-averse.
This is manifested in many ways – most clearly in our stubbornly high unemployment rate since to hire is to take a
risk. Ben Bernanke, the chairman of the Federal Reserve Bank, acknowledged this risk-aversion, speculating that the
unemployment rate will not return to six percent or below for another 4-5 years.
What does all this mean for the U.S. plastics industry? In the table below I provide an updated and expanded
analysis of the past and likely future trends of growth in volume terms for major markets served by plastics
industry participants. I have added to this year’s table a few more markets (e.g., heavy trucks, recreational
vehicles and packaging) in order to represent as comprehensively as possible the entire panoply of plastic
processing activities. I also have added 2010 data and out-year projections supplied by the organizations cited in
the table’s sources.
Trend of Output in Major Markets Chart (pdf)
The trend of the unweighted averages of these market indices (Average I) suggest that the volume of production
across these 10 market categories declined by 28 percent from 2004 to 2009, and it will take another five years to
regain the 2004 level. The trend of the weighted averages (Average II) presents a less dire picture; the volume of
output declined only 13 percent over the past five years, and it will exceed the 2004 level by 2013. The steady (2
percent per year) growth and large weight (33 percent) of plastics in packaging offsets to some extent the
continued collapse of the building industry, which has the second largest weight (17 per-cent).
A few comments are warranted regarding the likely future trend in selected markets:
Automotive: Of all the markets included in this year’s tables, automotive is the one bright spot. Compared
to the 14 percent bounce-back forecasted for 2010 last year, the monthly production data through November point to
a 43 percent surge. A return to the 2004 volume of automotive production seems within reach by 2014.
Building and construction: It’s impossible to underestimate the collateral damage to several major markets
for plastics (e.g., appliances, furniture) from the continuing collapse of the housing market, a segment of which
(houses financed with sub-prime mortgages) contributed mightily to the Great Recession. House repossessions so far
in 2010 have tallied 1.3 million, up from 900,000 in 2009, and the numbers are expected to go up again in 2011.
Mortgage loan modifications have failed to arrest this wrenching economic and social calamity. Loans 60 or more
days past due as a percentage of all mortgages will fall slightly to 5 percent in 2010 from 6.2 percent in 2009,
yet both numbers are multiples of the normal 1.5-2.0 percent range. These trends push up the total housing
inventory. As the supply of housing increases while demand stagnates due to continuing high unemployment levels,
house pricing has to decline another 5-10 percent to clear the market. And to make matters worse, the yield on the
10-year Treasury bond on which mortgage rates are based has been rising, contrary to the Fed’s intentions with its
latest quantitative easing program. So it will be 2012 before there any rebound in housing starts and 2015-2017
before residential building and construction regains the 2004 level.
Heavy trucks: The market for heavy (Class 8) trucks is heavily influenced by the timing of implementation of
EPA’s increasingly stringent standards related to greenhouse gas emissions from the engines in these vehicles. The
standards were raised in 2002 and 2007, triggering pronounced pre-buying of trucks in previous years. Standards
were raised once again in 2010, yet the recession dampened the extent of pre-buying. The next set of standards will
come into force in 2014, which explains the expected pause in heavy truck sales that year.
Medical: Irrespective of the hotly debated constitutionality of the Affordable Care Act, in an aging society
the demand for medical disposable and durable products will rise inexorably. In the absence of official data, we
assume a constant 3 percent increase in the volume of production of plastic medical/pharmaceutical goods from 2004
through 2014.
Packaging: This is another market which defies simple measurement of trends since it embraces bags, bottles,
caps and closures, film, pouches, etc. We assume that recent past and likely future volume growth approximates
twice the long-term growth of the U.S. population (i.e., 2 percent).
Recreational Vehicles: Recovery of the recreational vehicle industry hinges critically on trends in
household income and gasoline pricing, and the latter correlates in turn with crude oil pricing. As a result of the
Great Recession, oil pricing actually averaged only $62/barrel in 2009, but this positive for RV sales was
overwhelmed by the erosion of household wealth. The U.S. Department of Energy expects crude oil to cost $86/barrel
on average in 2011. Gasoline pricing is expected to average $3.00/gallon in 2011, up 8 percent from $2.77/gallon in
2010.
The trend of crude oil pricing obviously impacts forcefully on the cost-competitiveness of resins. There are
actually encouraging signs relative to future oil pricing. There is a lot more oil lying around; in light of recent
discoveries in Brazil and other countries, estimates of global oil reserves have been adjusted upwards. At the same
time, despite the voracious Chinese appetite for oil (and every other commodity), global oil demand has moderated
as a result of increased energy efficiency. The International Energy Agency once projected that the world would be
consuming 94 million barrels a day by 2011. Now they don’t see that level being reached until 2020.
Conclusion
As we bring the year 2010 to a close, over half of Americans in a Bloomberg poll conducted in early December say
they are worse off now than they were in 2008, and two-thirds believe the country is headed in the wrong direction.
Unemployment and jobs are the two most important issues facing the country, and yet the focus of the next Congress
will be on repealing and replacing the enacted healthcare reform and ensuring that no one’s marginal tax rate
rises. The federal government can afford to put off the inevitable; state and local governments, faced with looming
budget gaps, cannot. Thus the reduction of public sector jobs will offset any potential job creation in the private
sector in 2011. Many economists and business analysts foresee unemployment remaining mired in the 9-10 percent
range out to 2012.
U.S. net worth, which plummeted to $49 trillion in the first quarter of 2009, recovered to $55 trillion by the
third quarter of 2010. However, it would have to recover another 20 percent (23 percent in inflation-adjusted
terms) to regain the pre-recession peak of $66 trillion. Economists believe it will take at least the middle of the
decade for Americans to regain all their lost wealth.
In the end, any forecast for growth of the U.S. economy must be predicated on where such growth will emanate.
Consumption accounts for 70 percent of GDP. The stimulus package of 2008 failed to boost consumption, and there is
little prospect that the December 2010 compromise crafted by President Obama and the Republican leadership will
fare any better. Government spending at every level – federal, state and local – simply has to be reduced. There is
a glut of productive capacity in the country, so investment in plants, office buildings, retail outlets, et al.
will languish. The depreciation of the dollar, the supposedly unintentional side-effect of the latest Fed’s
quantitative easing program, may spur exports, but it is provoking competitive devaluations among our trading
partners.
Some business analysts would argue that there is a rosy scenario ahead for plastics industry companies serving the
major manufacturing industries. The Institute for Supply Management (ISM) reports that manufacturing output has
grown for 16 consecutive months, and it projects continued recovery through 2011. Companies in the manufacturing
sector are operating at 80.2 percent of capacity versus 72.8 percent in 2009. Exports are growing as the value of
the U.S. dollar weakens.
And yet the picture remains troubling for long-term future growth prospects in manufacturing, including the
plastics industry. 2009 was the first year in recorded U.S. economic history that the capital stock actually
declined. Claiming continuing uncertainty, companies accumulated huge cash hoards. Debt was reduced, and yet
capital investment languished and work-forces were cut. The only V-shaped recovery in evidence is in corporate
profitability. This conservative posture must be abandoned if we are to remain competitive with our trading
partners in both developed and developing countries.
Dr. Peter J. Mooney is president of Plastics Custom Research Services of Advance, NC and one of the plastics
industry’s foremost economic research experts on evolving domestic and global plastics industry market
opportunities. Visit Dr. Mooney’s website at www.plasres.com. |