The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), rose 1.1% in December on a three-month moving average (3MMA) basis, unchanged from November and October. On a year-over-year (Y/Y) basis, the barometer fell 1.1% percent in December.
The unadjusted data show a 0.7% gain in December following a 1.8% increase in November and a 0.7% gain in October. The diffusion index was stable at 71% in December. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for November was revised upward by 0.24 points and that for October was revised upward by 0.89 points. These were highly volatile months for the data. As always, the December data are provisional and subject to revision.
“With eight consecutive months of gains, the December CAB reading is consistent with recovery in the US economy,” said Kevin Swift, chief economist at ACC.
The CAB has four main components, each consisting of a variety of indicators: 1) production; 2) equity prices; 3) product prices; and 4) inventories and other indicators.
In December, production-related indicators were positive. Despite strength in housing activity, trends in construction-related resins, pigments and related performance chemistry were mixed. Reflecting strength in manufacturing, resins and chemistry used in other durable goods were strong. Gains in plastic resins used in packaging and for consumer and institutional applications were positive and suggest further growth in retail sales. Performance chemistry for industry continued to expand. US exports were positive, while equity prices increased, but at a slower pace. Product and input prices were modestly positive. Inventory and other supply chain indicators were positive.
The CAB is a leading economic indicator derived from a composite index of chemical industry activity. Due to its early position in the supply chain, chemical industry activity has been found to consistently lead the US economy’s business cycle, and the barometer can be used to determine turning points and likely trends in the broader economy. Month-to-month movements can be volatile, so a three-month moving average of the CAB reading is provided. This provides a more consistent and illustrative picture of national economic trends.
Applying the CAB back to 1912, 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.
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 reflecting activity data for the current month, as well as a three-month moving average. The CAB was developed by the economics department at ACC.
Current-month, unadjusted readings of the CAB are based on high-frequency weekly and daily data. For example, we use equity data as of the Thursday before the release date. Using mid-month data can lead to large revisions if conditions appreciably change in the second half of the month. We have moved the release dates for the CAB to the last Tuesday of each month. We hope this will minimize the revisions.
The next CAB is planned for January 26, 2021 at 9:10 a.m. Eastern.