ACC Data Shows Choppy U.S. Recovery

The American Chemistry Council’s (“ACC”) recently released first monthly report on its new, first-of-its-kind economic indicator shows weak demand for chemicals, pointing to a sluggish recovery in the U.S. economy. Demand for chemical products takes place early in the supply chain and changes in chemical production serves as a barometer to gauge the trends in the broader economy.

The report shows that the Chemical Activity Barometer (“CAB”), the Washington-based chemical industry trade group’s new macroeconomic indicator, dipped for the third consecutive month in June, suggesting economic growth to subside in the back half of 2012. It also signals a slow recovery in the domestic housing market.

The CAB composite index consists of indicators drawn from an array of chemicals and sectors associated with the production of chlorine and other alkalies, pigments, plastic resins and other selected basic industrial chemicals.

The index also factors in the stock data of chemical companies, hours worked in the industry and chemical prices. It helps in spotting the trends in the U.S. economy within sectors such as housing, retail and automobiles that are closely connected to the chemical industry.

The ACC noted that the CAB index sagged 1.3% to 88 in June following a decline of 0.7% and 0.6% in May and April, respectively. The index, which helps anticipate the peaks and valleys in the U.S. economy, registered gains in the first three months of 2012. The report also demonstrates a positive correlation between the CAB and Federal Reserve’s Industrial Production index.

With respect to the various components of CAB, the production-related indicator remained flat while chemical company equities, hours worked and prices shrank. CAB’s three-month moving average fell in June, signaling tepid growth prospects in the months ahead.

The ACC report further reveals a slowdown in construction-related activity as the production of chlor-alkalies and a few construction-related polymers slipped following several months of growth. The decline is significant as these chemicals are used to make a host of plastic products for housing construction.

The U.S. housing sector remains a weak end market. The domestic housing sector, a key consumer of chemicals, is likely to remain soft through 2012. Weakness in the electronics and construction end markets may weigh on the June quarter results of chemical companies including majors such as EI DuPont de Nemours & Co (DD - Analyst Report), The Dow Chemical Company (DOW - Analyst Report), Eastman Chemical Co. (EMN - Analyst Report) and Celanese Corporation (CE - Analyst Report).

The chemical industry is among the biggest industries in the U.S., a roughly $760 billion enterprise, accounting for 26% of the nation’s GDP. The chemical industry, by nature, is cyclical and heavily linked to the overall condition of the U.S. economy. It has been consistently leading the U.S. economy’s business cycle due to its early position in the supply chain.

The U.S. chemical industry represents roughly 19% of the global chemicals output. It is responsible for 10% of the nation’s merchandise exports, aggregating $145 billion annually. Chemical industry also touches 90% of manufactured goods, making the manufacturing industry the biggest consumer of chemical products.

While the U.S. is yet to reach a healthy growth phase and the European economy is still in tatters, the chemical industry is well placed to reap the benefits of the emerging market tailwind in 2012 with Asia being a beacon of growth.