Bill Wood: North American tool makers persevere through 2020

Throughout my career as an analyst of the plastics industry, it has been my distinct pleasure to survey, forecast and even root for the North American mold making segment.

And over the years, I have observed a few dominant themes that continue to describe this sector.

Three of the most prevalent are small business, optimism and bankruptcy. The shop owners and workers who constitute the mold making industry have greatly expanded and enhanced my appreciation and understanding of all three of these terms.

I cannot think of a more opportune time than now to review some data and trends that will shed some light on these themes. So far, we have survived a full seven months of the COVID-19 crisis. The first three months, roughly the second quarter of this year, we experienced the shortest and most severe economic recession on record. During the next three months, the third calendar quarter, we entered a recovery phase.

As always, the question now is, "What's next?"

Before I dive more deeply into the numbers, I should state the information I am sharing here is not specific to the mold making sector, or even the plastics industry. Such granular data does not exist to my knowledge. But I believe many of the small businesses in the plastics industry will likely appreciate a better understanding of this data.

When the shutdown of the economy was implemented, there was justifiable concern among economists and policymakers about the impact the shutdown would have on small businesses. There was great fear that a multitude of small businesses—and all of the jobs they generate—would be lost during the shutdown.

You will recall that many large businesses were bailed out by the government after the Great Recession in 2008, but most small businesses were not.

That was a mistake.

This time Congress acted swiftly and passed a huge stimulus package. I am pleased and somewhat surprised to report it worked—at least so far. According to data compiled and reported by the American Bankruptcy Institute, total U.S. bankruptcy filings through September are down 28 percent when compared with the first three quarters of last year. That figure is so large I can only surmise that many businesses that would have otherwise declared bankruptcy had we not had a pandemic were spared, at least for this year.

The chart indicates that total bankruptcy filings exhibit a strong seasonal pattern, but otherwise they were incredibly stable during the four years preceding 2020. Then they plummeted in the second quarter of this year when they probably should have increased, and they stayed low in the third quarter. There is even some evidence to indicate that the pace of total new business formations so far this year is actually running above the historic average.

There are three reasons: the aforementioned federal relief package (including the $500 billion Paycheck Protection Program); a sharp rebound in business activity over the past few months; and increased forbearance by landlords, suppliers and lenders. In addition to this, many plastics sectors have actually benefited from the shutdown because of the huge spike in demand for plastic packaging and certain types of medical/personal protection supplies.

Yet while I may be surprised by how well the small-business sector has fared during the past six months, the small-business owners themselves appear to be taking all of this in stride. The National Federation of Independent Business surveys small businesses each month and then calculates and reports a Small Business Optimism Index.

Based on the latest survey, the Optimism Index increased 3.8 points in September to 104.0. There are quite a lot of interesting details in the latest survey results, and if you are not already familiar with NFIB data, then I encourage you to log on to its website and take a closer look. But for the purposes of this column, I will mention three main takeaways from the latest report.

First, an index value of 104.0 is quite high by historical standards.

Second, the Optimism Index is exhibiting a V-shaped recovery, and the September reading is only a shade lower than the pre-COVID readings from January and February of this year.

And finally, this reading is two points higher than the figure from September of last year.

In other words, despite all that has happened during the past six months—which includes all of the uncertainty emanating from the election, the questions about a second wave of infections and whether there is another round of stimulus from Congress—small-business owners are more optimistic now than they were a year ago.

I am inspired by this.

There is one more inspirational theme I have observed in the mold makers and other small-business owners in the plastics industry over the years, and this is perhaps the most dominant theme of all: They persevere.

Perhaps they believe there will be another round of stimulus at some point in the near future; the only questions are just how large it will be and where exactly it is aimed. But something is definitely coming regardless of who gets elected to what next month, and this will give the economy a boost. You can see on the chart one of the largest one-month jumps ever experienced in this index, which occurred in December 2016, just after the last presidential election. I will for sure be looking at what happens with the index this coming December.

Perhaps they believe the second wave of the virus, when and if it does come, will be much better managed than the first wave because we have learned from both our mistakes and our successes the first time around. Or perhaps they suspect an effective cure or vaccine will be available in the coming months. Or perhaps they just know that cyclical downturns in the economy are always followed by a longer period of expansion.

I share their optimism. My forecast calls for real U.S. GDP to expand by 5 percent in 2021, and this is regardless of how the election ultimately turns out.

Elections are important for deciding political issues, but they tend to get too much attention when it comes to economics. As a nation, we innovate, we find solutions, and the free market U.S. economy steadily expands.