FocusEconomic reports lift chemical confidence

05 October 2007 23:37  [Source: ICIS news]

By John Waggoner

HOUSTON (ICIS news)--Signs of hope in the job market and optimism from the Federal Reserve Board this week lifted otherwise gloomy sentiment in the US chemical industry this week, sources said on Friday.

“The economic reports were mixed with good news outweighing the bad,” said chief economist Kevin Swift of the American Chemistry Council (ACC) in his weekly economic review of the industry.

Friday’s payroll employment statistics were more positive than analysts had broadly expected for September. The rate of unemployment grew, but an overall increase in general employment helped dispel the gloom.

One sour note in the jobs report was that chemical sector jobs fell by 0.3% in September from August, while employment in plastics and rubber products fell 2%, the US Labor Department reported on Friday.

The US housing market remains a significant worry for the chemical industry since construction is an important end-market.

The housing market should remain depressed for several months and drag down the nation’s gross domestic product (GDP) growth, according to Federal Reserve Board vice chairman Donald Kohn on Friday.

The US GDP will grow by only 2.4% in 2007, the slowest in five years, according to a forecast on Monday by the National Association of Manufacturers (NAM) industry group.

However, Kohn’s comments also suggested that the subprime home mortgage market collapse would not have much impact outside of housing.

“I anticipate that the economy will move back onto a moderate growth track,” Kohn said.

Kohn's comments were interpreted by some market participants as a sign that the Fed would be less likely to cut interest rates at its 31 October meeting as a means to spur spending and economic growth.

In the background there are concerns that higher oil prices and lower cost of capital could push consumer prices dangerously high, including recent comments by Dow Chemical's CEO Andrew Liveris.

Automotive manufacturing is another area under the lens by the chemical industry as an important end-market for polymers that remains vulnerable to the conditions in the US credit market. As with most capital goods, car manufacturers rely on financed sales to spur production.

“Despite concerns for further softening, light vehicle sales remained stable in September,” ACC’s Swift said on Friday.

Even so, the US auto industry will face a tough fourth quarter due to high energy prices and dents in consumer buying power, the world's largest auto producer, GM, said on Tuesday.

GM's executive director of global market and industry analysis, Paul Ballew, said car makers could see choppy fourth quarter earnings, even though GM's sales in September exceeded expectations.

Broader manufacturing growth was also mediocre in September, having grown at a slower rate than in August, according to the Institute for Supply Management (ISM) on Monday.

"Manufacturing growth continued in September while some sectors of the economy are apparently struggling,” the ISM said.

According to ACC's Swift, the feebleness should be watched, especially since new orders for goods fell more than expected in the month.

“This suggests softness in the manufacturing pipeline which could, in turn, suggest a cooling of broader economic activity triggered by the downturn in residential investment.  It also suggests weakness in manufacturing ahead,” Swift said.

By: John Waggoner
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