What We Can Learn From the Price of Cardboard

Holiday shopping is an annual tradition marked by wrapping paper, last-minute decisions, and children bursting with joy as they tear open gifts. It is also a lifeline for the US economy. A significant portion of yearly spending takes place during the holiday season, with some retailers seeing 40% of their annual sales during the final two months of the year. As US shoppers spend on holiday gifts and experiences, investors are provided with valuable insights into consumer confidence and the overall state of the economy.  

Initial data about the holiday shopping season was released earlier this week, as well as a surprising report showing the price of cardboard beginning to rise. While rising prices aren’t necessarily a good thing, this particular trend has sparked some optimism among financial analysts. That optimism is also fueled by the fact that the past few weeks have seen the unemployment rate fall in November, inflation continuing to cool, and the Federal Reserve confirming that they are considering multiple rate cuts in the coming year. This combination of good tidings has ignited a rally that has pushed portfolio values higher as we head toward the end of the year. 

As Americans fill their shopping carts with gifts, decorations, and cooking supplies, the National Retail Federation (NRF) expects a record-breaking $960 billion of holiday spending in 2023.[1] Holiday spending not only provides profits to retailers and gifts for children, it also creates thousands of jobs. To meet the increased demand, NRF expects retailers will hire between 345,000 and 450,000 seasonal workers during this holiday season. 

Holiday spending is off to a strong start, with data already showing that 200.4 million people shopped in person and online from Thanksgiving Day through Cyber Monday.[2] Spending on Black Friday and Cyber Monday shattered last year’s totals despite many consumer sentiment surveys warning that people are worried about the economy. Spending was up 7.8% compared to last year, according to Adobe Analytics. Even adjusting for inflation, Adobe confirmed that sales growth was “driven by net-new demand, not simply higher prices.” 

In our increasingly digital economy, when billions of dollars are spent on retail shopping, it means millions of packages need to be shipped directly to our doorsteps. This means retailers need millions of cardboard boxes. Higher demand leads to higher prices. Therefore, some investors keep an eye on the price of cardboard as it can be a leading indicator of the overall health of the US economy.

Cardboard prices are currently pointing to better times ahead. For the first time since the Federal Reserve began raising interest rates early last year, cardboard producers are lifting prices for the thick paper used to make delivery boxes. History indicates that when cardboard prices jump higher, the economy is revving up. Some analysts have said that it is too soon to tell whether price increases will persist or if they are a one-time adjustment in a retail market still reeling from the unique circumstances of the pandemic. 

Over the past year, cardboard producers slowed output at their mills as they sold down the mountain of inventory they amassed following the pandemic-fueled e-commerce boom. Inventories at US containerboard mills and box plants dropped to about 2.59 million tons at the end of September, down 14% from more than 3 million tons a year earlier.[3] Producers say that demand is now picking up, their own costs have risen, and their customers will need to pay more for corrugated packaging.  

We are careful to keep in mind that this is a single data point in a complex landscape of economic factors, and it doesn’t guarantee a particular outcome in the coming year. That said, as oddball indicators go, analysts generally agree that corrugated cardboard provides a good indication of economic activity. 

Higher spending has been a vote of support for the American economy. While we are encouraged by the resiliency of the US consumer and the initial data from the current holiday spending season, we remain cautious that the market may be overly optimistic about the likelihood of rate cuts in 2024 and could face disappointment when those don’t materialize. Even if the economy slows, US consumers have been the key driver over the past two years to help avoid a more significant downturn and set the stage for the next phase of growth. 

In keeping with the holiday spirit, investor optimism is currently abundant – and while we are grateful for the buoyancy of client portfolios as we wrap up the year, we are also taking careful steps to do regular rebalancing and stay well-diversified as we keep our focus on the long-term.

[1] 2023 Holiday to Reach Record Spending Levels National Retail Federation

[2] Thanksgiving holiday weekend sees ‘record number’ of shoppers: NRF Retail Dive

[3] What Cardboard Prices Tell Us About the State of the Economy WSJ