The Plastics Industry’s Lost Decade

Every month, the Federal Reserve Board compiles and reports production data for the major manufacturing segments in the U.S. industrial sector. This data is reported in the form of an index. The base is the average monthly output in the year 2007 set as 100 (or 2007=100). For obvious reasons the data series to which I pay the most attention is the one that measures the total output of plastics products (see Chart).

My working hypothesis is that if the injection molders, extruders, blow molders, thermoformers, and the other types of plastics processors and converters in the U.S. are making more things out of plastic, then very soon they are going to need more molds, tooling, screws, barrels, machines and equipment. And the converse is also true, if fewer plastic parts are being produced, then the need for things like molds will decline.

The two most striking things about the patterns exhibited in this chart of the monthly data are: 1) the severe impact that the most recent economic recession had on the plastics industry in 2008 and 2009; and 2) the flat trajectory that this data followed during the years from 2001 through 2007. Everybody in the moldmaking industry still has vivid memories of the precipitous drop in plastics parts production during 2008 and 2009 and the painfully slow recovery that has characterized 2010, so for this article I will discuss where we should go from this “Lost Decade”.

The formula for successfully recovering from banking and debt crises throughout history is by now pretty well-known to historians and economists. And it can be summed up in one word: austerity. Simply put we must consume less, save more, pay down debt (both household and government), pay higher taxes, use fewer government services, and endure higher levels of inflation. If we carefully follow this formula, the housing market and employment figures will recover in about five years, the equities markets will rebound in three to four years and the GDP data should start to grow strongly in less than two years. We are already more than one year beyond the crisis, so we are well on our way. We just need to have patience and practice discipline.

The real bright spot in all of this is the outlook for U.S. manufacturing. As moldmakers already know, and the chart clearly illustrates, American manufacturing took a beating in the past 10 years, but if the U.S. is going to return to a prominent position in the global economy, manufacturing will need to once again be a major driver of growth. We must reclaim our role as a net exporter and a lender to the emerging economies. Not just with software, computers, aircraft and energy technologies. Not just with educational, medical and legal services. But with heavy machinery, construction and agricultural equipment and even machine tools.

This will allow us to rehire our workers, re-tool our factories, and repay our debts. Our industrial resources are underutilized, not just in plastics products and moldmaking, but in many other industries as well. And there are emerging consumer markets, especially in China, that have money to spend and are in dire need of our goods. We just need to stop consuming, pay our debts and then start building.