From:Plastics News

My latest forecast for U.S. manufacturers of plastic caps and closures calls for firm market conditions through the end of 2015 followed by a steady improvement in market demand in 2016. This outlook is based on my analyses of the trends in the latest data from the Plastics News Business Monitor Index combined with the most recent trends in consumer income and spending patterns that drive demand for these products.

Our index for the caps and closures sector registered a 107.5 in the second quarter. This was a moderate improvement from the 103.1 value that was posted in the first quarter of this year. A value over 100 indicates that business activity levels increased when compared with the previous quarter. The index values so far this year indicate that business levels for caps and closures suppliers are solid, but not spectacular, and this is a pretty good description of the entire consumer sector in the United States.

The most gratifying trend to emerge from our quarterly survey of caps and closures manufacturers is the steady rise in new orders so far this year. The survey results indicate that orders were either unchanged or higher for nearly 80 percent of our survey’s respondents. The trend in new orders is the most heavily weighted component in our index because new orders are what drive all other business activities.

As a result of the upward trend in new orders, the overall production level for caps and closures suppliers is higher through the first half of this year and so is the number of employees.

Impact of lower resin prices

One component that is pulling the overall index down is the sub-index for prices received. In both the first and second quarters of this year the data indicate that prices received for caps and closures are declining. Often times these lower prices are an indication of weaker market demand, so it has a negative effect on the calculation of our total Index. But this is the wrong interpretation of the data for this year.

Resin prices have been on a downward trend throughout 2015, and processors in all segments of the plastics industry are passing much of these lower costs through to their customers. In other words, processors are paying substantially less for their materials, but they also are receiving less for their products. This is a good situation for all concerned as long as processors are maintaining their margins.

Our survey includes a question on profitability, and 86 percent of the respondents expect their profitability to either stay the same or improve in the coming months. So it is reasonable to conclude that they are maintaining their margins. This conclusion is bolstered by the sub-indices for future expectations and capital spending plans. In both cases the overall responses were at optimistic levels and rising.

The slow but distinct upward momentum in our index is corroborated by the economic indicators that measure activity levels in the U.S. economy. The overall U.S. manufacturing sector has been struggling against the macro-economic effects of both a stronger U.S. dollar (which raises demand for imports to the U.S. and lowers demand for our exports) and lower oil prices (which lowers investment in the energy sector). But both of these trends are beneficial to U.S. consumers, and the net impact to the U.S. plastics industry has also been positive.

In 2015, real disposable personal income levels are growing at the fastest rate since the recession ended six years ago. American households have been unusually conservative in their spending patterns in recent years, but the growth rates for a few consumer sectors are starting to accelerate. For instance, retail sales at grocery stores and health and personal care stores (crucial end-markets for caps and closures) are expanding at a strong pace when compared with total retail sales. They are also growing faster than their long-term averages.

The combination of these trends has generated record profit levels for suppliers of food and kindred products. Strong profit levels mean this sector has money to invest in the research, development and marketing of new products. That is what really drives demand for caps and closures.

Sustainable growth?

And the good news is that the growth rates in these trends from the consumer sector are sustainable for the foreseeable future. The U.S. economy will likely reach a level of full employment at some point in 2016. Wage increases, which have been stubbornly sluggish during this recovery cycle, are now starting to ramp up slowly. This pattern of slow, manageable improvement is also evident in the data that measures consumer confidence levels. It has taken U.S. longer than we would have liked to get to this point in the recovery cycle, but now that we are finally here, it will likely last longer than usual. So barring an unpredictable shock, business conditions in 2016 will be even better than they are this year.

After six years of life in an economic environment where 2 percent annual growth rates were the norm, we should soon enter a period of 3 percent annual growth in real consumer spending. It is a good time to be a consumer in the United States; therefore, it should be a good time to be a manufacturer of plastic caps and closures.