Gardner Intelligence Blog

The Gardner Business Index (GBI) finished December at 52.4. During the 2018 calendar year, the Index averaged 56.9, setting the highest calendar-year average reading in the Index’s history. The latest reading fell 5.9 percent compared to the same month one-year ago. Gardner Intelligence’s review of the underlying data for the month indicates that the Index – calculated as an average – was supported by supplier deliveries, production, new orders and employment. The components which lowered the Index included backlog and exports, both of which contracted.

Employment recorded a small expansionary increase while all other components moved lower during the month. Production and new orders both expanded at their slowest rates since late 2016 after peaking early in the year. The impact of slowing new orders and production has significantly altered the backlog picture which in the first quarter of 2018 recorded its highest reading in history before recording contractionary readings during the last two months of the year.

Housing Permits Grow for First Time since July

There were 101,700 housing permits filed in November 2018. While this was the second month in a row with more than 100,000 permits, November’s total was the second lowest since February 2018. Compared with one year ago, November’s permits increased 4.8 percent, which broke string of three straight months of contraction. However, the annual rate of growth decelerated for the second month in a row to 4.6 percent. This was the slowest rate of annual growth since May 2017.

In November, the year-over-year change in the 10-year Treasury rate was 41 basis points for the third month in a row, the the 10-year Treasury rate was relatively unchanged. With the Federal Reserve not raising rates at its last meeting and President Trump harping on the Federal Reserve for raising rates, could the rise in the year-over-year change in the 10-year Treasury rate be over? We will probably need a few more months to know the answer to that. 

Durable Goods Spending Growth Weakens for Third Month

In November, the month-over-month rate of growth for durable goods spending was 3.8 percent, which was the third month in a row that the growth rate was below the historic average of 5.5 percent. November’s rate of growth was the slowest since March 2016. The annual rate rate of growth was 5.9 percent, decelerating for the third straight month. This was the slowest rate of annual growth since February 2017. 

Low interest rates have helped boost durable goods spending as a percent of total consumer spending, but further deceleration in the rate of growth is ahead. Expect durable goods spending growth to slow through the first quarter of 2019. Beyond that, the trend in the growth rate will depend on whether or not the change in the 10-year Treasury rate breaks up or down out of its current flat trend.

Using the financial data submitted to the Securities and Exchange Commission (SEC) along with forecasts provided by major Wall Street brokerages, Gardner has compiled the financial results for seventeen publicly-traded firms in the containers and packaging industry to assess the current and future state of the industry. The results reveal an industry which has experienced eight consecutive quarters of revenues and earnings growth through the third quarter of 2018. Total inflation-adjusted revenue and earnings growth during this time were 12.6 percent and 18.6 percent respectively. In the latest quarter, the containers and packaging industry achieved year-on-year revenue growth – known as the “12/12” rate of change – of 9.2 percent. Similarly, earnings before interest, taxes and depreciation (EBITDA) achieved a 12/12 growth rate of 12.2 percent during the same period. These strong results enabled the industry to achieve a profit margin not seen since the great recession.

The industry’s financial success in recent years has also been well captured by the Plastics Processing Index – a product of Gardner Intelligence – which measures fundamental business conditions as reported by plastics processors. Among the six components which constitute this Business Index, 2017 and 2018 data indicate an industry which has rarely expanded faster. The index since 2017 has been driven in large part by growth in new orders, production and supplier deliveries. Backlog data collected since the first quarter of 2018 suggest that the industry has struggled to raise production levels sufficiently to match new orders growth, resulting in significant expansion of backlogs in the current calendar year.

Capacity Utilization Stays Above 76 Percent for Fourth Month

Durable goods capacity utilization was 76.4 percent in November 2018, which was the fourth month in a row with a rate greater than 76 percent. That has happened since the first few months of 2015. Therefore, capacity utilization was running at a relatively high sustained rate. That’s good news for capital equipment consumption.

On the other hand, November’s one-month rate of change was 2.4 percent, which was the third month of decelerating growth. Fortunately, the decelerating rate of month-over-month growth has yet to disturb the accelerating growth in the annual rate. Annual growth in durable goods capacity utilization reached 1.8 percent in November, accelerating for the sixth consecutive month to its fastest rate since May 2015. Again, that’s good news for capital equipment consumption. The annual rate of growth in durable goods capacity utilization tends to lead capital equipment consumption by seven to 10 months.

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