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The American Chemistry Council’s (“ACC”) recently released third monthly report on its leading economic indicator points to continued sluggish recovery in the U.S. economy.
The report shows that the Chemical Activity Barometer (“CAB”), the Washington-based chemical industry trade group’s macroeconomic indicator, rose 0.4% to 89.4 in August following an upwardly revised growth of 0.2% a month ago, suggesting slow economic growth in the remainder of 2012. This marks the second monthly gain in five months.
The index, which helps anticipate the waxes and wanes in the U.S. economy, registered declines in April, May and June. The data signals positive trends in the construction and light vehicles sectors.
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.
The CAB index 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. It has a positive correlation with Federal Reserve’s Industrial Production index.
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.
With respect to the various components of CAB, the production-related indicator and inventories remained flat during August while chemical company equities rose and prices shrank. CAB’s three-month moving average fell 0.6% in August, in line with July, signaling tepid growth prospects in the months ahead.
The ACC report further reveals sluggish domestic exports and softness in the production of plastic resins used in consumer and institutional applications. Beleaguered economic conditions in Europe coupled with slowing economic activity in some emerging markets, particularly China, have contributed to the frail overseas demand for American products.
The chemical industry is among the biggest industries in the U.S., a roughly $760 billion enterprise. The 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.
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), witnessed slowing economic activity in the June quarter, due to slow economic recovery in the U.S and fragile economic conditions in Europe. Activity in China and some other emerging economies slowed in the quarter.
While the U.S. is yet to reach a healthy growth phase and the European economy is still in tatters, the emerging markets are expected to show higher growth in output this year despite the recent slowdown.