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Leading Economic Indicator Heats Up

June 25, 2015

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), increased by 0.7 percent in June, followed by a similar gain in May, and an upwardly revised 0.5 percent gain in April. The pattern represents an acceleration of productivity not seen since the first quarter of 2011. Data is measured on a three-month moving average (3MMA). Accounting for adjustments, the CAB remains up 3.7 percent over this time last year, also an acceleration of annual growth as compared to the first half of 2015.

The CAB 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 June chemical equity process, product prices, and inventory all improved.

The CAB 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 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 2007 was used) of a reference time series. The latter is the Federal Reserve's Industrial Production Index.

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.

The next CAB is currently planned for July 28, 2015.

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