from the American Chemistry Council
The Chemical Activity Barometer (CAB), 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.
Said Dr. Kevin Swift, chief economist at ACC:
Geopolitical dynamics in the Middle East and Ukraine, Ebola, and other recent events lead to higher uncertainty and uneasiness. 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.
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.
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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.
