INSIGHT: So far, recession is unlikely despite market turmoil

HOUSTON (ICIS)–Chemical companies are expecting a lacklustre second half of the year, but, so far, they will unlikely suffer through a recession, despite the spate of pessimistic economic data and the worst stock-market selloff in more than a year.

• The financial press has said that much of the selloff was caused by investors abandoning the Japanese carry-over trade.
• Chemical executives have not warned of a possible recession during their earnings calls.
• It is unclear if recent events will increase the likelihood of larger and more frequent rate cuts by the Federal Reserve.

SO FAR, STATISTICS DO NOT INDICATE RECESSION
The recent selloff in the stock market was enough to give anyone a jolt.

The major US indices had three consecutive trading days of selloffs, with the last one on Monday causing declines that exceeded 2%. It was the worst day in more than a year.

The weakness of the subsequent relief rally is also concerning, with the declines resuming on Wednesday.

But the stock market is not the economy, and, so far, the four key statistics used to measure its health do not point to a recession.

One of those statistics, non-farm payrolls, grew by 114,000 in July, a pace below the expectations of most economists. While the US had a bad month, it is still adding jobs, said Kevin Swift, ICIS senior economist for global chemicals.

Moreover, the payroll statistics indicate that some of the weakness in the data was caused by the effects of Hurricane Beryl, Swift said.

Two other key statistics are still expanding, he said. Those are industrial production and real personal income less transfer payments.

Only real business sales have shown softness, Swift said.

PROSPECTS STILL WEAK
The unlikely risk of a recession provides cold comfort to the chemical industry, which has spent months waiting for a recovery after what many described as the worst destocking cycle ever.

Almost universally, companies have given up on the prospects of a second half recovery. Improvements in profit will have to come internally from cost-cutting or efficiency measures. The market will not help.

Consumers have largely spent the excess savings that they pocketed from government stimulus and support that followed the pandemic, Swift said. The lower quintile of consumers is under pressure.

Chemical companies noted stress among consumers who are more sensitive to costs, such as those who buy paints and coatings for do-it-yourself (DIY) projects.

They are buckling under the weight of elevated interest rates, which have made housing and consumer durables less affordable.

Before the markets for such items improve, Dow said that mortgage rates need to fall towards 5%.

The prospect of declines will depend on expectations for the benchmark federal funds rate, which the Federal Reserve will likely decide to lower at its next meeting on September 18.

Even then, it will take time for those rate cuts to trickle down to chemical markets. Huntsman said the lag is typically about two quarters.

Insight article by Al Greenwood

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