A dip or a downturn?

Economic growth, Oil markets

Are we seeing just a dip in economic growth? Or are we at the start of a downturn that may run for months, or even years? The answer to this question lies in the US, which still accounts for 25% of global GDP, and where US consumer spending is 70% of US GDP.

Optimists maintain that central bankers have the power to stimulate the economy via interest rate cuts. And certainly, as we saw again last week, the merest hint of further US reductions is enough to send stocks soaring worldwide.

But from a chemical industry viewpoint, the answer is not so simple. Kevin Swift’s excellent weekly report for the American Chemistry Council (ACC), gives a mixed picture. November’s US railcar loadings remained strong, as export activity continued to compensate for weakness in the housing and auto sectors.
PROD.bmp
But as the chart shows, global chemical industry production growth (ex-pharma) has slowed significantly since the summer in all regions. And the ACC notes that US leading indicators are now negative, and at a level usually associated with recession.

US housing data is very worrying from a chemical industry viewpoint. Each US housing start generates an average $16k of chemical demand, according to ACC calculations. And the massive fall in building permits does not bode well for H1 demand next year

November’s figures for new and existing US home sales are just awful, compared to 2006:

New home sales are down 24%; median prices down 13%; housing starts down 16%; building permits down 25%. Inventory is 8.5 months sales.
Existing home sales are down 21%, median prices down 5%. Inventory is 10.8 months sales.

A further worrying sign is that in the wider economy, US inventories are increasing rapidly, adding a full 1% to US GDP growth in Q3. This is perhaps not surprising, given the recent rapid rise in oil prices. Crude was only $71/bbl in early July, when I first suggested it could reach $100/bbl, and it would not be surprising if chemical/polymer buyers have been building even more stock in recent weeks as prices rose.

The optimists may still be right, and central bankers may be able to wave the magic wand that restores us to a growth path. But with US housing/auto sales so critical for the global economy as well as for chemical demand, and with feedstocks remaining tight, it is hard to imagine that the chemical industry can now avoid a serious downturn.

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