July 15, 2020
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Since the arrival of COVID-19 in January, our social, business, and economic lives have been upended in a way never seen in modern times. The effect of the quarantines and social distancing requirements to minimize the spread of the virus has thrown the U.S. economy into the most rapid and deepest decline that anyone alive has witnessed. The corrugated business has also felt the unprecedented economic shock waves of the pandemic. In assessing the impact on box shipments, one should be humbled by the large number of currently unknown alternative economic and societal outcomes that may ultimately develop.
Comparing the behavior of corrugated shipments and their key market drivers to the deepest economic recession that had slowed economic growth in the 19 months between December 2007 and June 2009 can provide some insight for independent corrugated converters and other stakeholders in the U.S. corrugated business. The charts and table associated with this article provide some interesting parallels between the two eras, even though the Great Recession unfolded over more than a year and a half, while the impact of the pandemic is barely a half-year old. During the first quarter of this year, the nation’s GDP declined by 4.8%, and economists are projecting a second-quarter economic decline of some 20% or more.
Most knockdown boxes are shipped to manufacturers, some three-quarters of which go to producers of nondurable goods, and some 44% end up packaging some food or beverage product. These are the box market drivers that we will use to gain insight into potential box shipment trends.
The first chart at the top of the next page shows the decline of manufacturing and box shipments over the course of the Great Recession. The data have been indexed with the value of each indicator placed at an average of 100 in 2012. U.S. manufacturing declined by a total of 20.8% over the course of a year and a half. Durable goods such as autos and appliances demonstrated the most rapid decline, dropping by 27.2%. Nondurable goods production, which includes such essentials as food, medicine, and cleaning products, showed less of a decline than did overall manufacturing. It dropped by 13.6% over 16 months. Within the nondurable goods category, box-intensive manufactured food products fell by only 3.7% over the course of 12 months.
The bottom chart on the next page shows the same data for the beginning of the coronavirus era. Manufacturing, food, and box shipments this year show some similarity to that of the last recession. While it is far from clear that the current economic nosedive has bottomed out in April, the easing of quarantines during May carries with it the hope that most of the economic damage was done in the months of March and April. The declines in the manufacturing sector during the coronavirus era somewhat match up to those of the Great Recession, except that they have been compressed into a four-month period.
This year, the bottom fell out of manufacturing production by 18.6% through the first four months, compared to its similar 21% decline during the last recession. Just as in the last recession, durable goods have absorbed the brunt of the downturn, as extensive unemployment forces households to focus spending on necessities at the expense of automobiles and other big-ticket items. In the last recession, durable goods production fell by a total of 27.2% in a decline that lasted the entire length of the recession. In the first four months of this year, durable goods production has declined by a very similar 25.7%. Last year, less than 8% of U.S. box shipments went to durable goods manufacturers, so the impact on total box shipments was cushioned.
Nondurable goods production also declined by similar amounts during both economic contractions. In 2008–2009, production fell by a total of 13.6% over 16 months. Most recently, it has declined by 11.1%, less than half of the decline reported in durable goods markets.
Food and beverages constitute the largest subsector of nondurable goods, accounting for 44% of current nondurable goods production. Food and beverage shipments dropped by only 3.7% over the first 12 months of the last recession. However, so far this year, the same category of products has dropped by 8.6%, less than the overall nondurable goods decline but still more than during the last recession. The larger drop came despite consumer overstocking of some food, household, and disinfecting supplies during February and March. One of the factors leading to a larger decline now is the suddenness with which unprecedented unemployment came at the start of the current epidemic.
In these charts, box shipments have been cast into a three-month moving average to reduce month-to-month volatility. During the last recession, these average box shipments dropped by 15.1%, reaching bottom 15 months after the recession started. During the early months of this coronavirus era, they have remained stable, advancing by a fractional 0.2% between January and April. The concentration of box shipments on food and other essentials in part explains this stability in the early months of the current crisis, but another factor is also at play. As quarantines began, consumers increased their online purchases of goods to avoid contact with others. The switch has been massive and positive for box demand, as the increased intensity of corrugated packaging to protect online orders has helped to sustain box demand so far.
What will happen in the months ahead is anyone’s guess as box suppliers try to manage the inventory reduction demands of customers and the economic adversity to be endured as the pandemic plays out. However, independent paper packaging converters will likely see market conditions that should limit the shrinkage in box demand to less than that for the entire manufacturing sector.
Dick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.“
