A Cautious Case for Plastics Manufacturing Growth
What's the difference between an optimist and a zealot?
That's a rhetorical question — and one for which I do not have a satisfactory answer. But in the current economic environment, I find myself asking it almost every day.
I admire optimism and enthusiasm. I try to model these traits, and I expect the same of any good leader.
Zealotry, on the other hand, makes me uncomfortable. I tend to regard it with disdain.
For many years, I have enthusiastically advocated for a revitalization of the U.S. manufacturing sector. During this time, I maintained an optimistic attitude that not only was such a transformation possible but also that America would find a way to make it happen.
Unfortunately, our elected leaders were either unable or unwilling to enact policy changes that would support such a transformation — until recently.
President Donald Trump's administration has enthusiastically (zealously?) embraced this challenge. But the implementation of the president's plan to energize the U.S. industrial sector has been so rapid and aggressive that it's caused a great deal of anxiety for all but the most stalwart proponents of the strategy.
Make no mistake: I want this transformation to happen. But I must confess that my trust in the process is, at present, less than solid.
Analyzing the data behind the policy
The only way I know to ease my anxiety is to analyze the economic data and search for trends that either confirm or refute the progress of this mission.
I realize the veracity of government data is also being questioned right now — but that's a story for another day. Until I see evidence that the data is flawed, I will continue to use it as I always have.
On the chart, I've plotted quarterly U.S. capital spending on industrial equipment — a subset of gross domestic product data compiled by the Bureau of Economic Analysis. This category excludes information processing equipment (computers) and transportation equipment (autos, airplanes), but it includes plastics processing machinery. For context, U.S. investment in plastics machinery and auxiliaries accounts for less than 2 percent of this data.
Steady growth — but is it enough?
This category comprises machines used on factory floors to produce durable and nondurable goods. They manufacture consumer products, and they also make other machines and equipment. If the goal is to revitalize U.S. manufacturing, then we must invest significantly more in industrial equipment.
The chart shows that the trend in recent years has been upward — a mildly positive sign. But the average annual growth rate for the past 18 years, adjusted for inflation, has been just 1 percent.
If you want a healthy rate of economic growth and a rising standard of living, then equipment investment must increase faster than 1 percent a year. Otherwise, we risk an ever-widening trade deficit — and in the U.S. context, a ballooning federal budget deficit. A 1 percent growth rate is not enough if the goal is to fund robust government services, balance the books and reshore significant production capacity.
Tariffs, tax cuts and transformation
To jump-start U.S. manufacturing, President Trump has implemented the most aggressive tariff policy in history. Tariff levels have never been this high. Countries with which the U.S. has the largest trade deficits have been hit hardest.
New trade agreements — such as those with Japan and the United Kingdom — include provisions for increased U.S. investment. It's no surprise that the Chinese owner of GE Appliances recently announced plans to invest $3 billion to upgrade its U.S. factories and avoid the tariffs.
In addition, the "big, beautiful" tax bill passed by Congress allows companies to deduct the full cost of industrial equipment in the first year, rather than depreciating the expense over time. In the short term, this may offset the negative effects of tariffs. In the long term, the goal is to spur significantly higher capital spending.
Too soon to tell
There is considerable risk in this strategy — and it's far too early to say whether it's working. I remain hopeful, but I need to see more evidence in the data, such as the trend line on this chart. If that line starts to accelerate upward, then I'll start to feel better.
I also need to see how this plays out in the U.S. plastics industry. There's a sizable trade deficit in plastics machinery, and the administration has not shown much sympathy for the argument that many machines used to make plastic products in the U.S. are not available from domestic suppliers. This means tariffs on these machines will either reduce processors' earnings or eat into suppliers' profits. Neither scenario is a win for the industry, so I'll be watching this closely.
Debt, data and decisions
Right now, it appears the federal government is on pace to collect about $400 billion in tariff revenue over the next year — funds that will be needed to mitigate the budget shortfall expected as a result of the tax overhaul.
As I see it, the only viable path out of this combined trade and budget deficit is to invest heavily in productive assets and hope the country remains solvent long enough to manufacture its way out of debt.
As I said, I'm anxious about this strategy. But I haven't heard any better ideas.