Plastics News - Show Daily - October 19, 2022 - 26

26 * Plastics News, October 19, 2022
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'Numbers That Matter' by Bill Wood appears in Plastics News monthly.
It takes a close look at data and trends to help plastics company
managers forecast next quarter and next year.
Recession or not, expect slower
growth in spending is inevitable
W
hile there may still
be many plastics
processors that continue
to experience
bottlenecks in the supply chain,
a growing number of manufacturers
now fi nd themselves
struggling with just the opposite
problem - oversupply and lagging
demand.
Global supply chains have
steadily improved in recent
months, and this is especially
true in the U.S., where in certain
market sectors, supply chains
are functioning at or near their
pre-pandemic levels. Unfortunately,
some of the improvement
in the supply chain situation is
due to the fact that consumer
demand for many types of goods
is now steadily slowing.
The chart indicates the overall
levels of inventories in the plastic
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Hall 14 A16/A18
and rubber products industries
are well above trend at the present
time. I am not yet too alarmed
by this because there are mitigating
circumstances for why this
might be the case. Nevertheless,
it behooves us all to be wary of
the risks and the volatility in the
current economic environment.
Exacerbating the problems
associated with varying imbalances
in the forces of supply
and demand are the issues stemming
from the recent sharp rise
in interest rates and the spiking
volatility in foreign exchange
markets. The result is a situation
in which deft inventory management
is not only increasingly crucial
to the health of your company
but also more uncertain and
riskier than ever before.
In order to understand better
how we got in this predicament,
a brief history review is useful.
Consumer demand for almost all
goods collapsed due to the pandemic-induced
shutdown, and
this resulted in the collapse of
the global supply chain. Shortly
thereafter, the government
stimulus checks started to arrive,
and consumers proceeded
to overspend on goods such
as home furnishings, computer
products and leisure equipment.
Overall, total spending on goods
boomed and total spending on
services languished.
After a year or so, the U.S.
economy gradually reopened,
but consumer demand for " stay
at home " types of products was
beyond satiated. Since the second
quarter of 2021, the amount
of money spent on goods in the
U.S. has actually been in decline
when adjusted for infl ation.
At the moment, consumer
spending for goods is now back
close to its long-term trend, but
the trend in the data is aimed
downward and there is mounting
evidence that indicates this
trend could overshoot to the
downside. Consumer confi dence
levels have rebounded from the
all-time lows they recorded this
summer, but they remain subdued.
In the third quarter of this
year, the Fed aggressively began
to raise interest rates in an effort
to destroy demand.
As of yet, the rise in interest
rates has not had a substantial
impact on the macroeconomic
data, and this includes the data
on infl ation. There are two reasons
for this. First, a substantial
percentage of consumer spending
is for goods and services that
are not fi nanced, so rising interest
rates will not immediately affect
demand for these goods.
One exception to this is the
auto sector. There was so much
pent-up demand for autos that the
rise in fi nancing costs will take a
little more time than usual before
it starts to show up in the data.
But make no mistake, that day is
coming at an accelerating rate.
The second reason why we
have yet to see an immediate
effect on the economic data is
there typically is a lag between
the time the Fed starts raising
rates and the time the full effect
of these hikes is observed in the
overall macroeconomic data.
Keep in mind that the decision
to raise rates was made because
demand was too hot. It is only
prudent for the Fed to try to cool
demand gradually.
That implies there will be a lag.
But it will happen. It may take
another two or three or even
four quarters to get there, but at
some point in the near future, the
employment data will turn negative
and demand growth will revert
back to its long-term trend.
It remains to be seen whether
the trend in total demand will
overshoot to the downside. If it
turns negative for a sustained
period of time, then the U.S.
economy will offi cially enter into
a recession. But recession or
not, slower growth in spending is
inevitable. Some of the early sectors
that will be affected are the
residential real estate and the
residential construction sectors.
It is quite possible that we are
already past the peak in these
sectors, though here again, pent
up demand will affect the timing
of these curves and also the impact
these trends will have on
demand for plastics products.
What does all of this mean for
the plastics industry? It means
the outlook for the coming year
depends signifi cantly on the
end market sector in question.
The segment with the largest
imbalance between inventories
and sales is motor vehicles and
parts. There has been modest
improvement in recent months,
but this sector is by far the most
out of balance of any of the major
end markets. The processors
that supply this sector will likely
experience solid demand for a
while longer.
End markets in which oversupply
is already a signifi cant risk
include consumer nondurables,
general merchandise consumer
goods, home furnishings, electronics
and appliances. The future
trend in the data for consumer
nondurables over the next few
quarters will best be described
as a reversion to the long-term
mean as consumers rebalance
their allocation between goods
and services. Market demand for
the more expensive items such
as furnishings, electronics and
appliances will be negatively
impacted by the rising interest
rates because many of these purchases
tend to be fi nanced.
To summarize, the global
economy continues to struggle
with the aftershocks of the pandemic,
the ongoing uncertainty
of the Ukraine/Russia confl ict,
and COVID zero-tolerance policy
in China. These problems have
resulted in high rates of infl ation
and destabilizing foreign
exchange rates, particularly for
currency pairs involving the U.S.
dollar. It will likely take at least
three or four quarters for these
issues to return to a more stable
point of equilibrium. Until then,
the risks to the U.S. and global
economies will remain elevated.
MANUFACTURERS' INVENTORIES TO SHIPMENTS RATIO:
PLASTICS AND RUBBER PRODUCTS
1.20
1.25
1.30
1.35
1.40
1.45
1.50
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Sources: U.S. Census Bureau, Mountaintop Economics & Research Inc.
Ratio, seasonally adjusted
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Plastics News - Show Daily - October 19, 2022

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