Is the Chemical Industry About to Experience a Cold Spell?

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 The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), posted a 0.3 percent decline in November on a three-month moving average (3MMA) basis. This marks the barometer’s first month-over-month drop since February 2016 and adds to the chorus of growing concern of slowing U.S economic expansion. On a year-over-year basis the barometer is up 2.8 percent (3MMA), a marked slowdown in the pace of growth from earlier this year.

The unadjusted measure of the CAB declined 0.8 percent in November and 0.6 percent in October.

The Chemical Activity Barometer has four primary components, each consisting of a variety of indicators: 1) production; 2) equity prices; 3) product prices; and 4) inventories and other indicators.

Major components of the barometer were mixed in November. Despite poor economic reports on housing, trends in construction-related resins, pigments and related performance chemistry were fairly positive and hint at slow gains in housing activity. Plastic resins used in packaging and in consumer and institutional applications were mixed while equity prices retreated sharply again in November. On the upside, inventory and product prices were positive.

The diffusion index was stable at 59 percent, following an upward revision in October. This index marks the number of positive contributors relative to the total number of indicators monitored. In short, the CAB continues to signal gains in U.S. commercial and industrial activity through mid-2019 but at a much slower pace as growth (as measured by year-earlier comparisons) has turned over.

The Chemical Activity Barometer is a leading economic indicator derived from a composite index of chemical industry activity. The chemical industry has been found to consistently lead the U.S. economy’s business cycle given its early position in the supply chain, and this barometer can be used to determine turning points and likely trends in the wider economy. Month-to-month movements can be volatile so a three-month moving average of the barometer is provided. This provides a more consistent and illustrative picture of national economic trends.

Applying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.

Chemical Activity Barometer for the Latest Six Months and Year-Ago Month*

Nov-17

Jun-18

Jul-18

Aug-18

Sep-18

Oct-18

Nov-18

CAB (3 MMA)

118.94

122.13

122.22

122.38

122.65

122.63

122.24

% M/M

0.5

0.1

0.1

0.1

0.2

0.0

-0.3

% Y/Y

3.5

4.0

3.9

4.0

4.1

3.6

2.8

CAB

119.63

122.30

122.38

122.46

123.10

122.32

121.30

% M/M

0.3

0.3

0.1

0.1

0.5

-0.6

-0.8

% Y/Y

4.0

4.1

3.9

3.9

4.4

2.5

1.4

*Percentage changes may not reflect index values due to rounding.

The CAB comprises indicators relating to the production of chlorine and other alkalies, pigments, plastic resins and other selected basic industrial chemicals; chemical company stock data; hours worked in chemicals; publicly sourced, chemical price information; end-use (or customer) industry sales-to-inventories; and several broader leading economic measures (building permits and new orders). Each month, ACC provides a barometer number, which reflects activity data for the current month, as well as a three-month moving average. The CAB was developed by the economics department at the American Chemistry Council.

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