Chemical Activity Barometer Suggests Growth

October 28, 2014

3 Min Read
Chemical Activity Barometer Suggests Growth

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), featured a slight decline of 0.1% this month, which is a deceleration from the 0.1% gain in September, as measured on a three-month moving average (3MMA). Despite the slight decline in October, the CAB still signals further U.S. economic activity through second quarter 2015. Additionally, though the pace of growth has slowed, current gains have the CAB up a healthy 3.6 percent over this time last year, and the barometer remains near its post-recession high.   

"Geopolitical dynamics in the Middle East and Ukraine, Ebola, and other recent events lead to higher uncertainty and uneasiness," said Dr. Kevin Swift, chief economist at ACC. "This month's decline, coupled with overall slowing of the pace of growth, suggest the U.S. economy is facing stronger headwinds. On the bright side, however, all indications still point to slow growth through 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 October, the components were mixed, with production slightly improved, equity prices down, production soft, and inventories further improved.  

Production-related indicators improved very slightly in October. The recent housing report showed recovery, but recent trends in construction-related plastic resins, pigments and other performance chemistry suggest a housing market still yet to break through to higher levels. Chemical equities experienced a sharp drop this month, while product prices were slightly soft. New orders and inventories further improved during October but at a slower pace.

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 longer lead (or perform better) than the National Bureau of Economic Research, by two to 14 months, with an average lead of eight months at cycle peaks. 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 November 25, 2014 at 9 a.m. Eastern Time.

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