Canadian Plastics

U.S. Economic Outlook:

By Claudia Verno   



Last year was a tough one for the American economy. Although the U.S. moved out of recession, growth was only 2.4%, much below its long-term potential. Industrial activity continued to be sluggish, bu...

Last year was a tough one for the American economy. Although the U.S. moved out of recession, growth was only 2.4%, much below its long-term potential. Industrial activity continued to be sluggish, business investment failed to pick up and profits were hampered by cut-throat competition, low pricing, and weak foreign demand. On the demand side, consumers held up quite nicely despite increasing pessimism, relatively high unemployment and rising indebtedness. Still, spending growth was much less than in past years.

There are some signs of a modest acceleration of growth in 2003. Productivity has remained robust so far, contributing to a recent pick-up in profits. However, most of this was due to workforce reductions and operation streamlining. Now that there isn’t much corporate fat left to trim, companies will have to begin looking elsewhere for sustained profits.

Because demand in the plastics and packaging industry depends on both broad manufacturing activity and consumer spending, 2002 was a mixed year. Whereas last year was bountiful for companies catering to the consumer goods or motor vehicle industries, it was considerably less so for those supplying industrial goods, transportation or telecommunication equipment. On the whole though, Canadian exporters in the plastics and packaging industry recovered nicely from the slowdown in 2001.

A high degree of competitiveness and a relatively strong U.S. dollar helped Canadian producers ship over $11.5 billion worth of plastic products across the border last year, a 12% increase over 2001. This year we expect plastics and packaging exports to the U.S. to see further growth, thanks to improving economic conditions. Nevertheless, there are some important risks to this outlook.

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The greatest unknown in our scenario of continued solid export performance for plastics concerns the pace and the strength of the U.S. economic recovery, the key to which will be the extent of tension in Iraq and impact on the U.S. population. Higher oil prices and heightened security concerns may make U.S. consumers and businesses more cautious, dampening the strength of the recovery.

Growing federal and state budget deficits also pose a risk to the economic outlook as they may put upward pressure on long-term interest rates. This would have a depressing effect on an already slowing housing market, which could ultimately drag down consumer spending. Even if stock markets were to recover, this would not wash out the negative wealth effect of a sudden drop in home prices. Higher long-term interest rates would also weigh on corporate investment spending, which could curtail demand for capital equipment.

Claudia Verno is an economist with EDC’s Economics Team, Country Analysis Department.

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