INSIGHT: The US facing a disappearing recovery

02 October 2012 17:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The deepening downturn in US manufacturing was reflected in economic reports released last week while the news on business sentiment was not good.

Uncertainty over the US “fiscal cliff” has weighed on manufacturing sentiment, says Standard & Poor’s, while executives have lowered their expectations of business activity for the remainder of the year.

The most recent data suggest house prices are moving up and that, as the ratings agency says, “people are happy”, but renewed spending confidence does not translate into much confidence among business planners.

Manufacturing companies – the big users of chemicals in the US market – are not happy.

“The weakening US manufacturing sector got another bruise this week as data for August durable goods were remarkably disappointing," S&P said.

“Orders fell 13.2% month over month, which was much worse than the 4.5% decline consensus expected and comes after a downwardly revised 3.3% gain in July (was 4.1%). Durable [goods] orders are still up 5.5% year to date.” Capital goods orders are an indicator of business investment and they rose by 1.1% in August over July but only after two consecutive months of declines.

The Chicago Institute for Supply Management’s Purchasing Managers Index (PMI) fell to 49.7 in September, lower than expected and an indication for the first time since September 2009 of a contraction in manufacturing.

But, as the American Chemistry Council (ACC) noted in its latest weekly economics report, regional manufacturing indicators were mixed with activity improving in Texas. “Several key indicators of manufacturing activity turned in disappointing results and continue to suggest that like manufacturing in other parts of the world, US manufacturing is struggling as well,” it said.

Consumer confidence, on the other hand, bounced back to a six month high. Spending is on the rise although incomes have slipped after taking taxes, higher priced gasoline and other goods and services into account.

“Ultimately, consumer spending depends on income growth which remains lacklustre in this weak labour market,” the ACC said.

The indicators, therefore, suggest that manufacturing spending will be constrained for the remainder of the year with manufacturing activity under pressure. Chemical producers cannot realistically expect much of a lift from consumers who are still constrained by decreasing household incomes and reduced spending power.

That having been said, however, chemical sector activity is suggesting that there may be some more light on the horizon.

The chemical trade association’s Chemical Activity Barometer (CAB) rose marginally (by 0.3%) in September, the third consecutive monthly gain. The June, July and August CAB readings were, towards the end of last month, revised upwards too and followed three consecutive months of decline.

The key word, from analysis of the latest CAB report, is growth, the ACC says. The production-related indicators used to construct the latest CAB were “generally positive”, it adds, with more gains in construction-related plastics, coatings, pigments and other chemicals. These gains suggest that the housing market recovery continues. Other components, however, were “less positive with product and input prices stable and US exports continuing to slow”.

The CAB is a composite index of chemical sector indicators which reflect the industry’s early position in the supply chain. As such, it can provide a lead for business cycle peaks and troughs.

“While it is encouraging to see three consecutive months of gains [in the CAB], this is not yet cause for celebration,” the ACC’s chief economist, Kevin Swift, said on 25 September. “Rather, what we’re seeing is that the CAB is signalling sub-par economic growth into 2013 as the economy continues to face strong headwinds and concerns around the fiscal cliff crystallise. Interestingly, we are seeing this year’s economy repeat the pattern of 2010 and 2011.”

ACC economists have compared the situation to the old Charlie Brown comic strip where the character Lucy holds the football for Charlie but removes it at the last moment as he goes to kick it.

“Just as the first quarter discussion about economic recovery is finally gaining traction, the proverbial football – the recovery – disappears, hence the ‘Charlie Brown’ effect,” Swift said.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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