INSIGHT: Blistering pace of US economic growth now slowing, posing challenge for chems

NEW YORK (ICIS)–The blistering pace of US economic expansion fuelled by trillions of dollars in fiscal stimulus, highly accommodative monetary policy by the Federal Reserve and pent-up demand unleashed from the reopening of the economy, is now slowing.

The spreading Delta variant of the coronavirus is not causing widespread lockdowns or restrictions in the US, but uncertainty and trepidation, which is denting consumer confidence.

Economists are making downward revisions to 2021 US GDP growth forecasts with consensus now at 6.2% versus 6.6% a month ago – the first substantial downward revision this year.

Source: Blue Chip Economic Indicators

Retail sales in July fell 1.1% month on month after a 0.7% gain in June. Motor vehicles and parts sales were down 3.9% and ecommerce sales fell 3.1%, offsetting gains in gasoline (+2.4%), and restaurants and bars (+1.7%).

INFLATION CONCERNS EASE
Inflation concerns, which have also been hitting consumer confidence, are easing. Most stark has been the pullback in commodity prices. We have seen a collapse in lumber prices, followed by big pullbacks in crude oil (notwithstanding this week’s surge), and now iron ore and copper.

The Consumer Price Index (CPI) rose 0.5% on a seasonally adjusted basis in July after a 0.9% gain in June, with core CPI (excluding food and energy) up 0.3%. On a year-on-year basis the CPI was up 5.4% with core CPI up 4.3%. While the figures are still elevated, the pace of inflation is clearly slowing.

Economists’ views on inflation are consistent with the Fed’s ‘transitory’ narrative, as they see the central bank’s preferred inflation measure – Personal Consumption Expenditures (PCE) price index – declining from 4.1% in Q4 2021, to just 2.1% by Q4 2022, in line with the Fed’s 2% target.

Signals that the Fed will finally start tapering its monthly $120bn in Treasurys and mortgage backed securities some time this year could also tamp down inflationary pressures.

On the fiscal side, the Senate has passed a $1tr infrastructure bill, but final passage remains uncertain along with that of another proposed $3.5tr spending package. Passage of both in their current forms would spur additional inflation concerns.

In the meantime, the US unemployment rate in July fell 0.5 percentage points to 5.4%, while average hourly wages rose slightly, for the fourth consecutive month of gains.

HOUSING AND AUTOMOTIVE ROLL OVER
The two key end markets for chemicals – housing and automotive – are both rolling over. Housing starts fell 7.0% in July from June to a still solid 1.53m, with single-family starts down 4.5%.

Light vehicle sales fell 4.1% in July to a seasonally adjusted annual rate (SAAR) of 14.8m units, the third consecutive month of decline and flat versus a year ago.

The automotive sector continues to be constrained by the semiconductor shortage, with July North American auto production down around 15% from June and automakers announcing further cuts. Average dealer inventories are at just 19 days versus normal levels of 60-90 days.

MANUFACTURING ACTIVITY SOLID BUT SLOWER
Overall manufacturing activity continues to be healthy but momentum is slowing. The July ISM Manufacturing PMI eased to 59.5 versus 60.6 in June, logging its 14th consecutive month of expansion (above 50) but lower for two months in a row.

The slowdown in manufacturing growth is being reflected in a key chemicals leading economic indicator. The American Chemistry Council’s (ACC) Chemical Activity Barometer (CAB) rose 0.5% in July on a three-month moving average basis after a 0.8% gain in June.

The unadjusted CAB data show a 0.1% gain in July, a slowdown from the 0.3% rise in June and 1.0% increase in May.

“The latest CAB reading is consistent with expansion of commerce, trade and industry, but growth has peaked,” said Kevin Swift, chief economist at the ACC.

One “bright spot” of the growth slowdown may be that waning demand gives supply chains time to catch up and rebuild inventories amid continuing logistics jams.

Insight article by Joseph Chang