We recently invited Tim Quinlan, managing director and senior economist for Wells Fargo Corporate & Investment Banking, to speak during the mid-year M. Holland Economic Update. Touching on the plastics industry outlook, Quinlan provided a cautiously optimistic forecast for the U.S. economy and discussed the impacts of COVID-19. He pointed to several key economic indicators — including gross domestic product (GDP), unemployment and inflation — that illustrate an improving economy and growth for our businesses and industry sectors.
At the time of the presentation in May, Quinlan noted that the vaccine rollout had successfully brought U.S. case numbers down to the lowest level since March 2020. Vaccination progress is triggering economic expansion, particularly in consumer spending. Quinlan pointed to an impressive forecasted GDP of 7% for the year. If realized, this would mark the fastest GDP growth since 1984 and make 2021 the second-fastest year for growth since 1955.
Government support of household incomes played a pivotal role in bolstering consumer pocketbooks. The combination of government stimulus and other financial relief measures along with forced thrift, Quinlan explained, led to a record surge in saving. “After more than a year of saving at higher-than-typical rates, households are now sitting on a war chest of almost $2 trillion,” he said.
Over the past year, consumers have also exceeded expectations in spending. Spending for durable and non-durable goods has fully recovered and even reached new heights. “When you break out consumer spending between its parts, the goods side of spending is already fully recovered, but the services side of things has been suppressed,” Quinlan explained.
Despite services being slow to match the rebound of goods, people are spending on housing, financial services and healthcare. According to Quinlan, the country is largely waiting for recreational services to pick back up. As social distancing requirements continue to scale back, spending in categories like dining and travel will be critical to further growth over the next few quarters. Alongside these positive trends, the economy is experiencing growing pains, including supply chain disruptions, continuing high unemployment and concerns around inflation.
As we at M. Holland have experienced, business inventories are tight, causing additional supply chain backlogs. And a week-long blockage of the Suez Canal only further exacerbated an already stretched supply chain. “Wherever you are along the supply chain, what you’re experiencing right now is something between low and all-time lows in inventory,” Quinlan said.
For the plastics industry, the current state of supply and demand is unprecedented. In a normal economy, plastics industry experts would have expected the resin shortages to abate. Industry leaders expect supply chain disruption to continue for the foreseeable future — likely into 2022 — with the possibility of worsening if untimely events such as the Suez Canal blockage or hurricanes in the Gulf of Mexico occur. Businesses will need to continue bracing for volatility.
Like the supply chain, employment levels have a long road back to the pre-pandemic peak. “In the charts you’ve seen, things generally look better by the end of the forecast period than they did before the pandemic, but with unemployment, we don’t quite get there,” Quinlan said.
Contributing to a weak labor market are slower workforce participation rates and sectors with job displacement in 2020 that haven’t bounced back. Quinlan forecasted the overall job market might experience a full recovery by the end of 2022. Still, the road to recovery for the broader manufacturing industry is likely to be much longer. A recent study from Deloitte and The Manufacturing Institute found that while the broader manufacturing industry recouped 63% of jobs lost due to the pandemic, there could be as many as 2.1 million jobs left unfilled by 2030 — vacant positions that could cost the U.S. economy as much as $1 trillion.
One of the most concerning economic factors, according to Quinlan, is inflation and whether recent price increases are transitory or could potentially derail economic expansion. The U.S. Federal Reserve remains resolute that the current inflation is transitory, and the central bank plans to keep interest rates near zero to support the economic recovery. Government legislation could also help ease economic growing pains. Quinlan highlighted several policy initiatives, outlined their long-term impacts and provided an overview of the current deficit, including how environmental regulations could affect businesses.
Several legislative initiatives, like the American Jobs Plan and the American Families Plan, could dramatically impact the nation’s economic health. However, Quinlan cautioned not to expect those effects to manifest any time soon. “Federal investment spending takes time, likely years or decades, for the country to fully realize its impact,” he explained.
Quinlan also highlighted how environmental legislation and regulation might affect businesses, especially in manufacturing. With an average of 51 billion tons of greenhouse gases released into the environment annually, manufacturing and electricity contribute 58% of those emissions. Therefore, Quinlan explained, those two sectors will most likely be the focus of green policy initiatives. Businesses will have to embrace green operations and contribute to a green economy to be competitive in the future. Remaining competitive is just one of the many reasons why M. Holland has focused on developing sustainable practices and priorities over the last several years.
The last forward-looking area Quinlan discussed was the mounting national deficit. Currently, the U.S. is running the biggest federal budget deficit and has the largest federal debt-to-GDP ratio since World War II. “The most troubling thing to me is that for 45 years, we had a pattern of shrinking the deficit during good times and then growing it during recessions, but over the last few years, we’ve consistently and continually run bigger deficits,” Quinlan said.
At this point, most investors aren’t showing concerns about the growing U.S. debt. And while the government will eventually have to address and reduce the deficit, a crisis is likely years in the future.
At M. Holland, we’re optimistic about our business and key markets as we reach the midway point of 2021. And while we anticipate these challenges to continue, as the economy recovers, we plan to operate with a forward-looking mindset, taking lessons learned over the past year to bring value to our business. If you’re interested in watching the full mid-year M. Holland Economic Update with Tim Quinlan, please submit the form below.