Outlook '09: No end in sight for US recession - economist

24 December 2008 16:53  [Source: ICIS news]

US recession persistsBy Al Greenwood

HOUSTON (ICIS news)--The US economic recession is showing no signs of ending, and chemical producers will continue struggling with weak demand, economists say.

In fact, no leading economic indicator shows the recession bottoming out during the next six months, said Kevin Swift, chief economist at the American Chemistry Council (ACC).

"It could make it the longest recession since the 1930s," Swift said.

As it is, chemical output will shrink in 2008-2009 in North America and western Europe, according to the ACC.

In the rest of the world, output growth is expected to slow significantly.

Predicting the timing of a recovery is difficult because the chemical market is contending with weaker demand and inventory destocking, said Bruce Chalmers, director of transaction services at PricewaterhouseCoopers.

Destocking is masking the true state of demand in the market, he said, making it difficult to measure market health.

Regardless of the weak economy, many chemical companies remain committed to their long-term strategies, Chalmers said. "These companies have announced strategies that they are sticking to."

In fact, many of the companies are destocking as part of larger cash-management strategies, Chalmers said. "It is not lost on anyone that cash is king these days."

With cash in hand, companies develop new products, expand into new markets, acquire other businesses or achieve other parts of their strategies, he said. "Companies are continuing to look to growth potential."

Although companies retain their long-term strategies, they are adjusting the timing of those goals, he sad.

Companies could delay expansion plans or start-up dates, said Saverio Fato, the global chemicals leader for PricewaterhouseCoopers. At the same time, they could speed up plans to shut down high-cost capacity.

Ultimately, stability will return to the market, with supply and demand reaching a new balance, Fato said.

Such a recovery, though, could still be months away.

In the US, two key chemical end markets - housing and construction will likely remain weak well into 2009.

Housing is an important end market for chemicals, in that each new house contains an average of $16,000 (€11,500) worth of chemistry, according to the ACC.

The market has crashed, with US new housing starts falling from 197,900 in May 2005 to a record low of 44,600 in November 2008, according to the US Department of Commerce.

In fact, November's figure was the worst since the department began recording housing starts in January 1959.

October's housing starts were only slightly higher than the decade's low of 68,900, reached in December 2007, the department said. Before then, the last time housing starts were so low was in December 1991, when they reached 65,600.

Despite the slowdown in house construction, the US still has an oversupply, as foreclosures continue to replenish the market, according to statistics.

A new wave of foreclosures could hit the house market if the US economy remains mired in a recession, said Cynthia Kroll, senior regional economist at the Fisher Center for Real Estate and Urban Economics at the Haas School of Business at the University of California at Berkeley.

"The foreclosure problem has to be resolved," Kroll said. "All of the different programmes put in place so far at chewing at the edges of it."

In addition to houses, automobiles also make up an important end market for chemicals. Each automobile has an average of $2,200 worth of chemistry, according to the ACC.

Through much of 2008, monthly sales of US automobiles fell by double digits year over year for both cars and trucks.

($1 = €0.72)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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By: Al Greenwood
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