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posted on 28 July 2015

July 2015 Chemical Activity Barometer Rises. Still Year-over-Year Growth Rate Slows.

from the American Chemistry Council

The Chemical Activity Barometer (CAB), increased by 0.1 percent in July. This follows consecutive monthly gains during the second quarter, despite downward revisions in May and June.

Data is measured on a three-month moving average (3MMA). Accounting for adjustments, the CAB remains up 2.1 percent over this time last year, a slight deceleration of annual growth as compared to this time last year. Said ACC Chief Economist Kevin Swift:

A number of trends remain evident as we head into the second-half of the year. There was upward momentum in plastic resins used in light vehicles, which are on track for a very good sales year, but we also continue to see declines in oilfield chemicals and U.S. exports overall, largely as a result of softer oil prices and a strong U.S. dollar. Despite these modest headwinds, the Chemical Activity Barometer is still signaling slow, albeit potentially accelerating, gains in business activity into the early part of 2016.

The Chemical Activity Barometer 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 November, the components were mixed, with production flat, equity prices up, production down, and inventories continuing to improve.

z chemical_activity_barometer.png

Caveats on the Chemical Activity Barometer (CAB):

The definition of the CAB:

Chemical Activity Barometer (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.

This index is a mixture of monetary / non-monetary elements with an analysis methodology which is not transparent - and does include some non-chemical industry elements such as the ISM manufacturing index and residential building permits. The composition and concept of the CAB according to the authors:

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 Chemical Activity Barometer 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.

As this is a relatively new leading index, our biggest concern is backward revision (which degrades real time accuracy). Thankfully (providently?) backward revisions have been relatively small to date.

No single economic forecasting index has proven to have all the answers, as the reason the economy recesses is a combination of changing dynamics. Econintersect will continue to review this leading index and others as part of our monthly economic forecast.


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