US chemicals barometer signals slowing economy

FT data.pngThe blog’s latest post for the Financial Times’ ‘FT Data blog’ has just been published.

It highlights the ACC’s new Chemicals Activity Barometer.

By guest contributor Paul Hodges

I suggested in an earlier post that chemical prices were an excellent leading indicator for the health of the global economy. The data highlighted that firms were finding it difficult to pass through crude oil related price increases. In turn, this was a warning that both the global and Chinese economies might be slowing faster than generally supposed. This caution since seems to have been amply justified.

Thus a new initiative by the American Chemistry Council (ACC) deserves watching. The ACC is the trade body for the US chemical industry, and it has developed a new Chemicals Activity Barometer which aims to provide early warning of changes in the wider US economy.

ACCa Jul12.pngThe chart above shows the latest reading of the barometer (green line), versus the official recession readings (grey column) since 1948 from the National Bureau of Economic Research (NBER). Full data for the graphs is available on the ACC website. It uses a three month moving average to avoid short-term fluctuations.

The ACC note it:
• Provides a lead of two to 14 months, with an average lead of eight months at business cycle peaks
• Leads by one to seven months, with an average lead of three months at cycle bottoms

Worryingly, the barometer has been in a downward trend since March. Historically, a decline for three consecutive months signals a slowing economy. Thus the barometer is warning that second half economic performance is likely to disappoint in terms of both the domestic economy and US exports.

ACCb Jul12.pngThe second chart shows the linkage between the barometer and industrial production (red line) over the past decade. There is clearly a very close relationship, with the barometer tending to have sharper moves, both up and down. This is clearly helpful for signalling turning points.

The bad news is that the chart confirms that the barometer (green line) is signalling a slowing US economy. It has diverged from the industrial production index (red), just as it did in 2007 before the last recession began.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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