ASC: Spending set to sustain US growth

The US economy is enjoying another robust period of sustainable growth, despite global headwinds, which is good news for adhesive and sealant makers

Adhesives and sealants are important components in many different products for many end-use markets. Consequently, growth in demand for adhesives and sealants in the US is closely tied to the growth of the overall economy.

Consumer spending is good for the economy and hence good for adhesives demand Copyright: Rex Features

That is good news for the adhesives and sealants industry, according to Dr Ken Mayland, president of ClearView Economics and opening keynote speaker at the 2015 ASC Spring Conference & EXPO. He predicts sustainable growth for the US economy through 2016, despite of (and in some cases because of) events taking place abroad, continued gridlock in Washington, the rise in the value of the dollar and cheaper oil.

In fact, as of March 2015, the US was 69 months into the latest sustainable growth cycle, and this one looks like it will be at least as long as the sustainable growth periods that occurred in the last three decades, which Mayland says lasted an average of 92 months.

Sustainable growth occurs when there is confidence in the markets and signs of growth are visible. “The key is job growth; when job growth occurs, income growth accompanies it, which leads to spending growth. As demand increases, companies require even more workers to produce more goods to meet the growing demand, which translates to even further job growth.

“This sustainable path will be maintained as long as there is sufficient skilled labour and production capacity to keep the economy growing,” Mayland observes.

The US economy has a tendency to grow, and will do so until something occurs to interrupt the growth path. Wars can do that, such as when Iraq invaded Kuwait in 1990, as can an unexpected spike in energy prices (think OPEC in 1973) or too much credit, such as in the most recent recession.

“These events all led to re-establishment of the economic equilibrium,” Mayland explains. People and companies tend to freeze their behaviour under such conditions. Businesses put capital spending on hold, and individuals tend to hold on to their money as well, and both contribute to a slowdown of the economy.

GROWTH WILL INCREASE IN 2015
Fortunately for the US, Mayland believes, there is a currently sufficient labour pool and spare capacity to maintain sustainable growth through 2016. He pegs the recent annual economic growth rate in the US at 2.5%, and predicts that for 2015 that number will rise to approximately 3.0%, despite a slight softening at the end of 2014 and beginning of 2015 that he views as “fine tuning”.

That modest growth rate should reflect very positively on the adhesives and sealants industry, because these materials are key components of many different products with applications in many end-use markets, and as the economy grows, demand for adhesives and sealants should improve as well.

Several factors could influence the length of the sustainable growth period for the US economy, but Mayland does not anticipate anything derailing growth in the near future, even though conditions in Europe and around the world are troubling, the value of the dollar is rising and oil prices continue to remain low.

Of course, problems in other regions may have some impact on the US economy, but Mayland believes that for the most part the US is strong enough to withstand them. The EU continues to face major issues, and particularly the potential for Greece to withdraw from the EU. If Greece does elect to leave the EU, it is possible that other countries in severe economic difficulties may follow suit.

The EU is also facing an aggressive Russia and the volatile situation in Ukraine. The continued war in Syria and the fight against the so-called Islamic State in Iraq are having impacts on local and regional economies as well. China, too, is struggling with a slower-than-desired growth rate (7%) and a growing debt problem that is much larger than anything seen in the US, according to Mayland.

DOMESTIC TRENDS OUTWEIGH TRADE
Why won’t these issues have any significant drags on the US economy? International trade is important to the US economy, but unlike the countries of Europe, which are highly integrated and co-dependent, trade is a smaller share of the US economy. Thus, domestic trends in consumption and business investment largely trump cross-border trade flows.

Politics at home will also have little impact on the current sustainable growth trajectory for the US economy, according to Mayland. “Gridlock in Washington has not been bad for the economy. The recent session of Congress was one of the least productive in the country’s history, but the stock market hasn’t seemed to mind,” Mayland notes.

Activities in advance of the 2016 presidential election shouldn’t have any real impact 
in 2015, and in 2016, campaign spending should provide a boost to the economy.

Mayland also does not believe the rise in the value of the dollar (approaching 15% recently) will have much influence on the growth of the US economy. “It is generally assumed that if the value of the dollar goes up, then people will buy cheaper imports and US manufacturers will lose their competitive advantage. The situation is much more complicated, however,” Mayland notes.

First, he says, US companies do not raise the prices of their products when the value of the dollar increases, they accept lower profit margins. Some products will be cheaper, of course, such as consumer electronics, but most people do not switch to buying all imports; they may buy a few imports and then use the savings on those products to buy something else made in the US.

“As a result, the overall correction of the US economy due to the recent rise in the value of the dollar has not been very big,” Mayland comments.

OIL PRICE FALL WILL NOT BE EXTENDED
Low oil prices have been a boon to many businesses and individuals, but generally such periods do not last very long. In the last 30 years, when large drops in oil prices occurred, Mayland points out that they did not last long once the price hit bottom, and typically within one year prices were 70-100% higher than they were before they fell.

While the current situation is slightly different because OPEC has elected not to cut production and allow prices to fall with the hopes of hurting US shale producers, as well as major oil producers Iran and Russia, there are forces that will drive the price of oil back up. For one thing, many major, older oil fields are nearly depleted and production levels from these fields (Alaska, Venezuela, the North Sea) are falling.

In addition, tremendous demand growth will occur in China and India as more people in these countries rise to the middle class. Mayland also notes that many companies have halted oil exploration in the US and reduced their workforces. “Together, these factors will ultimately lead to a return to higher oil prices, so everyone should enjoy the lower prices we are seeing today while they do last,” he says.

In summary, despite the turmoil in many other parts of the world, Mayland is optimistic about the US economy in 2015 and consequently expects that the adhesives and sealants industry will experience positive growth as well.