INSIGHT: Chemical sector data bode ill for US Q2 GDP report

26 July 2012 16:24  [Source: ICIS news]

By Joe Kamalick

Increasing worries over US recoveryWASHINGTON (ICIS)--On the eve of a crucial US report on the nation’s second quarter economic performance, key chemical industry markers and other production reports suggest that the slowdown is worsening.

The American Chemistry Council (ACC) reported this week that its new measure of US economic leading indicators was flat in July after falling for three consecutive months, suggesting that the second half will slow further and that critical US exports will flounder as Europe’s fortunes falter.

Because the chemicals industry is at the top end of the supply chain and feeds a wide spectrum of other downstream manufacturers and industrial consumer sectors, its bellwether caution for near-term performance bodes ill for the overall economy.

On Friday this week, the Commerce Department will issue its first estimate of US gross domestic product (GDP) growth for the second quarter.

The US economy saw GDP expansion of only 1.9% in the first quarter this year, a sharp decline from the near-normal 3% GDP growth rate seen in the fourth quarter of 2011.

Most economists, including those at the US Federal Reserve Board, think Friday's GDP report will show a further slowing of economic development, well below the first quarter’s anemic 1.9% rate and perhaps as low as 1%.

That forlorn outlook is reflected in chemical sector data.

In reporting the second month of its new chemical activity barometer (CAB), the council said that the business gauge held steady at 88.5 in July, the same as the reading in June.

But that is not cheering news.

“July data continue to suggest that broader US economic growth in the second half of 2012 will be weak, while the CAB also suggests a slowing of US exports during the rest of the year,” said ACC chief economist Kevin Swift.

Slowing export activity could have disproportionate impact on the overall US economy because export trade has accounted for as much as 40% of US growth since the recession ended in June 2009, according to the Associated Press.

Consequently, a decline in export trade could cut the legs out from under the already wobbly US recovery.

The council also noted that a three-month moving average for the chemical activity barometer declined in July, further suggesting “muted growth prospects in the months ahead”.

The CAB combines data from a range of chemicals and sub-sectors including the production of chlorine and other alkalies, pigments, plastic resins and other basic industrial chemicals.

The barometer also factors in chemical company stock data, hours worked in chemicals manufacturing, and publicly available chemicals pricing and inventories. Broader data sets, such as housing starts and new orders for general manufactured goods, also are included, according to the ACC.

“The chemical industry has been found to consistently lead the US economy’s business cycle given its early position in the supply chain,” Swift said, “and this barometer can be used to determine turning points and likely trends in the wider economy.”

Although the CAB flat-lined in July, the three straight months of decline in the measure leading up to July are “historically a sign of slowing economic activity”, the council said.

Applied retroactively, the CAB was at 90.3 in March, fell to 90 in April, then to 89.4 in May and to 88.5 in June.

The council’s broader outlook for declining US second-half performance was most immediately reflected in the chemical industry’s own output data.

ACC said that US chemicals production fell by a narrow 0.1% in June from May, marking the second straight month of declining output for this key US industrial sector.

The council said that the slight decline in its Chemical Production Regional Index (CPRI) for June followed a downwardly revised drop of 0.5% in May from April.

The fall-off in chemicals output was concentrated in four major US production regions, the Gulf Coast, Midwest, Southeast and West Coast sectors.

The council said that flat production in the other three regions – the Ohio Valley, Mid-Atlantic and Northeast – meant that there was no positive growth elsewhere to offset declines reported for the four western, southern and central regions.

However, compared with the same month in 2011, June’s US chemicals output was still up by 0.3%, the council said.

On a year-to-date basis, chemicals production in the first six months of this year was up by 0.2% compared with the first half of 2011.

But those narrow year-to-year gains might not be enough to weather the gathering storm of overall weaker US and global economic performance.

The continuing weak economic data reflected in the CAB echo multiple other recent reports indicating that the US economy is slowing significantly, in large part because of the ongoing eurozone debt crisis, which in turn is hurting US export sales.

Federal Reserve Board chairman Ben Bernanke said last week that the US economy is decelerating and that a new recession looms in early 2013.

US business economists also reported that they expect the nation’s economy to weaken in the second half, and the International Monetary Fund (IMF) warned that the euro crisis has reached a new and critical stage.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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