INSIGHT: US economy seen primed for growth

07 June 2007 15:49  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS news)--Despite a sharp fall in US gross domestic product (GDP) for the first quarter, many analysts see the national economy primed for growth, particularly in the broad manufacturing sector so vital to chemicals production.

The Department of Commerce reported that US first quarter GDP fell to a nearly invisible 0.6% annualised rate of growth, down from the department’s initial estimate of 1.3%. The first quarter’s growth rate was the slowest since the fourth quarter 2002 when the economy grew by only 0.2%. 

Normal growth for a healthy economy should be around 3% or 3.5% on an annual basis. A GDP growth rate of only 0.6% suggests that the patient barely has a pulse.

However, the bare GDP figures for the first quarter are not as moribund as they might appear.

Kevin Swift, chief economist at the American Chemistry Council, noted that the downward revision in the country’s first quarter economic performance was larger than most analysts had anticipated. “But looking at the details,” Swift said, “the domestic side of the economy is actually doing better than previously thought.”

The downward revision, said Swift, was due largely shrinking business inventories and higher imports. The increased imports in turn were in large measure due to a gain in US purchases of high-priced gasoline and other fuels from foreign sources.

Imports aside, Swift points out that the components of domestic demand - consumer spending, business and residential investment and government spending - were revised upwards for the first quarter.

“Despite the headline news of growth being sliced in half,” said Swift, “there was more domestic spending activity in the economy than first estimated.”

The closely watched Purchasing Managers Index (PMI) published by the Institute for Supply Management rose to 55% in May and marked the fourth consecutive month of expansion in the US manufacturing sector.

Norbert Ore, chairman of the institute’s business survey committee, noted that: “Manufacturing expanded in May as the PMI rose to its highest level in the last 12 months.”

The PMI was at its lowest point in the last 12 months in January when it bottomed out at 49.3%.

Of the 20 industry sectors tracked by the institute, 12 reported growth in May, including chemicals manufacturing. Among the other 11 growth areas were important downstream consumers of chemicals and chemicals-based products such as fabricated metals, foods and beverages, computer and electronic products, transportation equipment, machinery, wood products, textiles and electrical equipment and appliances.

The National Association of Manufacturers (NAM) also saw a welcome glimmer of dawn for the manufacturing sector.

The US Labor Department reported that the manufacturing sector lost some 19,000 jobs in May, chiefly in the hard-hit automotive sector. However, aside from automobile production, the manufacturing jobs picture was more positive.

“The silver lining to the dark cloud for manufacturers is that production employment - jobs most closely tied to output - appears to be stabilizing,” according to NAM chief economist David Huether. “This is a hopeful sign that manufacturing is emerging from the slowdown that began last September,” he said.

Huether also cited May’s encouraging PMI number from the Institute for Supply Management.

“Buoyed by increases in production, new orders and exports,” said Huether, “the ISM report [the PMI of 55% in May] signals that demand for manufactured products is improving both at home and abroad.”

Despite the manufacturing job losses, centred chiefly in the automotive sector, Huether said that “signs of growth in manufacturing are apparent”.

Swift agreed. He said prospects for the broad US manufacturing sector are looking up. That, he said, is good news for US producers of basic and specialty chemical products that feed into the general manufacturing segment.

Swift points out that spending for non-residential construction continues to grow, helping to offset some of the negative numbers in new home building.

In addition, while new home sales continue to run behind the record-setting pace seen in the real estate boom years of 2003-2006, consumers are spending elsewhere. “Consumers plan to purchase more appliances and new cars but fewer homes,” Swift reported, citing consumer data from the Conference Board.

“Consumers expect business conditions to improve, although they remain somewhat cautious,” he said. Even so, consumer confidence remains at levels that support spending, he noted.

Consumer spending is the principal driver of US commerce, accounting for two-thirds of the country’s economy.

By: Joe Kamalick
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