THINK TANK - Housing squeezes chemicals

28 May 2007 00:00  [Source: ICB Americas]

The continuing and protracted slump in the housing market is going to further squeeze margins for a broad array of chemical manufacturers, and the chill in home building could give the whole economy a nasty cold.

The Department of Commerce reported recently that home construction actually improved in April with housing starts up 2.5% to a seasonally adjusted and annualized rate of 1.53m units versus 1.49m units in March.

April's gain in housing starts marked the third straight monthly increase since the first of the year. January's housing starts were at 1.4m and February inched up to 1.48m units.

However, those slim gains only look good in isolation. In contrast, the 2m housing starts seen in April 2005 and even the 1.8m home construction starts in April last year - when the housing downturn was already under way -show just how weak the home-building sector is.

It is likely to get worse.

While housing starts have inched up since January, the Commerce Department also noted that building permits took a major hit in April.

April's building permits were at a seasonally adjusted annual rate of 1.43m, down nearly 9% from March's figure of 1.57m.

David Seiders, chief economist at the National Association of Home Builders, said the crisis in the subprime mortgage market - loans made to high-risk borrowers at escalating interest rates - has infected the broader mortgage and housing sector.

"We're now projecting that home sales and housing production will not begin improving until late this year," Seiders said, "and we're expecting the early stages of the subsequent recovery to be quite sluggish."

This is bad news for chemical manufacturers because the new-home construction market is a key downstream consumer sector for the chemical industry, driving demand for a wide variety of chemicals and chemical-based products such as polyvinyl chloride (PVC) pipe, insulation, paints and coatings, adhesives and synthetic fibers, among many others.

The housing market could have broad impact even for chemical producers who are not suppliers to home construction.

David Huether, chief economist at the National Association of Manufacturers (NAM), is particularly worried by job losses that he said can be traced to the housing slump and that indicate a wider economic decline.

Retail sales jobs are falling because consumers are shopping and buying less, reducing demand for sales staff.

"This is a clear signal that the strong pace of consumer spending posted in the first quarter will likely not continue into the second," Huether said.

As consumers' spending accounts for two-thirds of US economic activity, the nation's economy is likely to see a further, broad-based decline in the months ahead. That means less demand for clothing, automobiles, computers, recreational equipment, personal care products, and many other consumer items that drive upstream chemical manufacturing.

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