Chemical Activity Barometer: US economy stabilizing after 3 month decline

Chemical Activity Barometer signals average lead of eight months at cycle peaks

WASHINGTON – The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), stabilized in November, rising 0.1 per cent following three consecutive months of decline.

Oct. data was revised up 0.3 per cent and Sept. by 0.2 percent. All data is measured on a three-month moving average (3MMA). The pattern reverses a downward trend that had begun to gain momentum. Accounting for adjustments, the Chemical Activity Barometer remains up 1.3 per cent over this time last year, a deceleration of annual growth. In Nov. 2014, the CAB logged a 3.4 per cent annual gain over Oct. 2013.

The unadjusted CAB reading for Nov. was also up, rising 0.4 percent.

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 Nov. chemical equity prices strengthened and led overall equity market performance. Product prices and inventories were relatively stable.

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 US 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 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 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.

U.S. exports continue to fall, influenced by a slowing global economy. Global trade continues to lag behind both global industrial production and broader economic activity.

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.