INSIGHT: US chemicals activity points to slower second-half growth

27 June 2012 15:42  [Source: ICIS news]

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By Nigel Davis

LONDON (ICIS)--Given its early position in the supply chain, the chemical industry has been found to consistently lead the business cycle in the US, American Chemistry Council chief economist Kevin Swift says.

So the Council’s just-launched Chemical Activity Barometer (CAB) can, according to Swift, “be used to determine turning points and likely trends in the wider economy”.

The CAB encompasses production activity for basic chemicals and plastics; chemical company share price data; hours worked in chemicals; price information and customer industry inventories; as well as some broader economic measures.

And it looks set to find a place in economists’ tool kits and, possibly, raise the profile of a sector which, according to the ACC, touches more than 95% of overall US production activity.

The CAB is not a leading indicator of chemical industry activity, the ACC stresses, but it is a leading indicator, or “barometer”, for US industrial production (IP) and the business cycle.

The barometer’s correlation with industrial production is strong – more than 0.90 between IP and the CAB eight months prior. Data going back to 1948 demonstrates this and shows that peaks and troughs in chemicals are reflected in the industrial economy.

Of note is the fact that the chemical sector leads peaks in the business cycle by a wider margin than it does troughs.

So where are we now and what does the chemicals business say about US industrial activity and the US economy? Unfortunately, not a great deal that is good.

ACC Chemical Activity Barometer“As we look at the remainder of 2012, the CAB points to a continued weakness in economic growth in the second half of the year,” Swift said in a Tuesday 27 June release.

 “The CAB also appears to suggest that the long-anticipated US housing market recovery is emerging, but the recovery will be slow.”

According to the ACC economics team, early data from the June CAB shows that it fell by 1.3% from the previous month. This comes after relatively strong gains earlier in the year.

“In addition to the slowdown of broader economic recovery, construction-related activity has weakened as production of chlor-alkalis and some construction-related polymers declined after several months of increased production,” the trade group said.

“This decrease is significant because these chemicals are used to manufacture a variety of plastic products for building and construction of housing, such as siding, window frames and doors.”  

Chemicals are heavily influenced, of course, by demand in supply chains that extend to autos, agriculture and consumer spending generally, as well as construction. The industry’s broad base, as well as its position providing intermediates, gives it a unique position in the supply chain.

“Applying the model back to 1947, the CAB has been shown to provide a longer lead (or perform better) than the National Bureau of Economic Research (NBER), by two to 14 months, with an average lead of eight months,” the ACC said this week. The NBER notes the official beginning and end of recessions in the US.

The ACC’s barometer shows that large parts of the chemical industry at least are directly and rapidly influenced by spurts and slowdowns in the economy.

The way in which the barometer is constructed, tapping into data on new orders, consumer expectations, building permits and the like, make it a leading indicator for the economy. Industrial production as well as employment and certain other data are coincident indicators because they follow the business cycle more closely in time. Lagging indicators, such as costs and inventory data are used more in a confirming role.

The sharper turn down in the chemicals indicator in June compared with earlier in the year gives cause for concern but reflects the data emerging from other sources.

Consumers are spending less and US Federal Reserve chairman, Ben Bernanke, has said that he sees little prospect of an economic upturn.

In its latest weekly economic report, the ACC said that, while the long-awaited recovery in housing in the US appears to be in place, much depends upon the health of the broader economy and the “state” of the consumer.

US chemicals production slipped again in May after two months of decline. Production fell across most of the country and railcar data – which shows how chemicals are moving across the US – indicated what the ACC called “softness” continuing into June.

The trade body uses a traffic light system to reflect the relative health of both the national economy and the chemical industry with green for go and red for stop. On 22 June it was talking of a yellow banner for the economy and yellow for both basic and specialty chemicals.

“Global chemical production fell in May, following five months of gains. Activity was soft in North America, Western Europe, and Central & Eastern Europe,” it said.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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