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Manufacturing Is in a Sweet Spot

By AICC Staff

May 24, 2021

width=300There is no question that the coronavirus pandemic has upended the U.S. economy. COVID-19 triggered the fastest recession in U.S. history. Although the nation has clawed most of its way back from the worst effects of the pandemic, the economy remains splintered, with big winners and losers.

The pandemic and the home-oriented economy it fostered have been a boon for e-commerce and the more intensive corrugated and other paper packaging it needs to get goods safely through that retail channel to consumers. Nonstore retail sales have risen by 28% from pre-pandemic levels. But soaring e-commercewidth=300hasn’t been the only benefit for corrugated packaging

demand.

After tumbling during the initial virus lockdown last year, spending for goods recovered rapidly, in part because of generous federal fiscal policy. On the other hand, spending on services also dropped, but it never recovered, as many service-oriented businesses such as restaurants, travel and lodging, and theaters either shut down entirely or operated at substantially reduced capacity to comply with social distancing requirements. Corrugated boxes go into the packaging of goods, which saw an upturn, and less into the services sector, which turned down.

width=300With year-end stimulus checks and extended unemployment benefits in consumers’ hands, retail sales of goods soared in March with overall growth of 9.8%. Several categories important to demand for corrugated packaging led the growth. Nonstore retail sales (almost entirely online sales) soared by 29% in January, while building materials supply stores posted a 19% gain in sales from year-ago levels. Food sales made up for a lackluster year-end showing by rising 12% ahead of previous January’s sales.

width=300U.S. manufacturing is benefiting from that increased spending, which has continued through the first quarter at a strong level. The Institute for Supply Management’s monthly purchasing managers’ index is one of the most closely watched indicators of manufacturing activity. The top chart above shows that manufacturing activity has been expanding ever since it fell so dramatically last April. Since then, the sector has been expanding for nine consecutive months, reaching its broadest expansion in three years in February. New orders, production, hiring, and exports all showed robust growth. Even faster growth was constrained by a significant rise in supply chain disruptions, as some factories in the manufacturing supply chain suffered from a shortage of employees as a result of COVID-19 infections and imported materials resulting from disruptions in international trade. Other key results from the monthly survey were the rise of backlogs to the highest level since April 2004 and a rise in raw material costs that hasn’t been exceeded in a month since May 2008.

The single largest market for corrugated in the U.S. is the packaging of nondurable goods. Some 75% of annual corrugated box shipments go to package these fast-moving consumer goods. Even though domestic production of these goods lagged behind consumer spending growth, in part because of the rising trade deficit for these goods last year, the trend since last April was still one of steady recovery, with December’s shipments exceeding prior-year output. At the outset of 2021, nondurable consumer goods production rose by 2.8% above pre-pandemic levels, a promising start to the year.

Food production is the largest and most corrugated-intensive segment of consumer nondurable goods production. Food output also got off to a good start this year with a rise of 1.7% in the domestic manufacture of food products, as the top chart at right shows.

In addition to the boost corrugated demand has received from soaring online sales and stronger demand for manufactured products, paper packaging demand has also benefited from positive conditions in the construction sector.

One of the benefits of more stay-at-home time and the increase in need for home office space during the pandemic has been a rapid rise in repair and remodeling projects. As the bottom chart at right shows, pandemic stimulus checks have spurred sales at building and material supply stores. The monthly increase in those sales from December to January was nearly 5%.

Construction markets, another important destination for corrugated, also started this year off with a bang. Residential building permits rose by 22% in January, a harbinger of strong building activity ahead. Concurrently, demand for residential housing is outstripping supply, with inventories lower than in several decades. Fifty-two percent of Americans between the ages of 18 and 29 are currently living with their parents, a level not seen since the Great Depression of the 1930s. As they return to the workforce, they will sustain demand for housing for several years.

In summary, the changes brought about by our response to the coronavirus pandemic have created several bright spots in the economy that should support stronger demand for corrugated and other paper packaging.


PortraitDick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.

 

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