US recession in next 12-18 months not likely - ACC economist

Author: Joseph Chang

2019/09/18

NEW YORK (ICIS)--An economic recession in the US in the next year and a half is unlikely, the chief economist of the American Chemistry Council (ACC) said on Wednesday.

“Of course a lot can happen, including shocks to the system as we saw over the weekend. But the consumer economy is doing very well with strong job creation, rising wages and the lowest unemployment since 1969 - two generations ago,” said ACC chief economist Kevin Swift.

“The pace of job growth has moderated but that’s primarily a supply issue with the retirement of baby boomers. When you ask CEOs their number one, two and three concerns of what keeps them up at night, one of them is always recruiting and talent retention,” he added.

Swift spoke at a meeting of the Societe de Chimie Industrielle.

There is clearly a manufacturing slowdown worldwide, including in the US, and the Treasury yield curve has briefly inverted in the past several weeks.

The yield curve inversion refers to short-term debt (typically the 2-year Treasury) yielding more than long-term debt (10-year Treasury).

However, this is not enough to trigger a recession, he noted.

“An inversion of the yield curve has to be a steep inversion and for a prolonged period of time. We haven’t seen that yet,” said Swift.

Similarly, the ACC’s Chemical Activity Barometer (CAB) would have to show a deeper and prolonged downturn on the order of 3-4% over three months.

The CAB, which is a leading indicator of US economic activity, fell just 0.1% in August on a 3-month moving average basis following a similar drop in July and four months of gains. Year on year it was flat.

For key end markets, US light vehicle sales have peaked but are still at elevated annualised levels of over 16m units. Plus, vehicle size has been getting larger in the US, the economist noted.

And the US housing market is gaining momentum. On 18 September, the US Commerce Department announced US August housing starts up 12.3% to a seasonally adjusted annual rate of 1.364m units - the highest level since June 2007.

For US basic chemicals, the economist sees volumes rising 4% in 2019 and another 4.75% in 2020 before tapering off as major projects are completed.

Specialty chemicals volumes are expected to gain 2% in 2019 and 2.5% in 2020, he noted.

Yet the US-China trade war is “playing havoc” with supply chains with US chemical exports to China down on the order of 20-25% year on year, and US imports of chemicals from China off 25-30%.

“The risks - both to the upside and downside - are trade, trade and trade,” said Swift.

The risk to the US economy from higher oil prices in the wake of the attacks on Saudi Aramco’s facilities are relatively muted at current levels, he noted.

While higher oil and gasoline prices could cause consumers to cut back spending on other areas, it would also spur more drilling activity in the US which would have a ripple effect. The net impact would likely be on the order of -0.1% to GDP, said the economist.