Leading economic indicator shows marked deceleration from second quarter
The Chemical Activity Barometer, a leading economic indicator created by the American Chemistry Council (ACC), dropped 0.4 per cent in Sept., following a revised 0.2 per cent decline in Aug.
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.
The pattern shows a marked deceleration, even reversal, over second quarter activity. Data is measured on a three-month moving average (3MMA).
Accounting for adjustments, the Chemical Activity Barometer remains up 1.2 percent over this time last year, also a deceleration of annual growth. In September 2014, the Chemical Activity Barometer logged a 4.1 percent annual gain over September 2013. It is unlikely that growth will pick up through early 2016.
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. During September chemical equity and product prices were down, production was flat, and inventories moderated.
The Chemical Activity Barometer is a leading economic indicator derived from a composite index of chemical industry activity. 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 Chemical Activity Barometer back to 1919, it has been shown to provide a lead of two to 14 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 Chemical Activity Barometer leads by one to seven months, with an average lead of four months. The median lead was three months. The Chemical Activity Barometer 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.
“Business activity cooled off in September,” said ACC Chief Economist Kevin Swift. “Chemical, other equity, and product prices all continued to suffer, signaling a likely slowdown in broader economic activity.”
One bright spot continues to be plastic resins, particularly those used in light vehicles, says Swift. Light vehicles are a key end use market for chemistry, containing nearly $3,500 of chemistry per vehicle.
Sales of light vehicles are on track to record a banner year, the best since 2000,” he said.
Also at play is the ongoing decline in U.S. exports. According to Swift, global trade is lagging behind both global industrial production and broader economic activity with deflationary forces at play.
‘With this month’s data, the Chemical Activity Barometer is signaling slower gains in U.S. business activity into early 2016.
The Chemical Activity Barometer 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 Chemical Activity Barometer was developed by the economics department at the American Chemistry Council.