July 2021 Chemical Activity Barometer Index Growth Softens

from the American Chemistry Council

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), rose 0.5% in July on a three-month moving average (3MMA) basis following a 0.8% gain in June. On a year-over-year (Y/Y) basis, the barometer rose 16.3% in July (3MMA).

The unadjusted data show a 0.1% advance in July, a slowdown from a 0.3% rise in June and 1.0% gain in May. The diffusion index reached 88% in July. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for June was revised upward by 0.14 points and the reading for May was revised downward by 0.34 points. Monthly revisions have generally been positive during the past year. The July data are provisional and subject to revision.

*Percentage changes may not reflect index values due to rounding.

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.

In July, production-related indicators were up. Trends in construction-related resins and related performance chemistry were solid and suggest an improving housing market. Resins and chemistry used in other durable goods were strong. Plastic resins used in packaging and for consumer and institutional applications showed firm growth. Performance chemistry for industry was largely positive. Exports grew, reflecting improvement in overseas markets. Equity prices improved, while product and input prices continued to expand, indicating tightness of key markets. Inventory and other supply chain indicators were positive.

Per Kevin Swift, chief economist at ACC:

The latest CAB reading is consistent with expansion of commerce, trade and industry, but growth has peaked.

/ or https://www.americanchemistry.com/Jobs/CAB/short-term-1.pdf

Caveats on the Chemical Activity Barometer (CAB):

The CAB is designed and prepared in compliance with ACC’s Antitrust Guidelines and FTC Safe Harbor Guidelines; does not use company-specific price information as input data, and data is aggregated such that company-specific and product-specific data cannot be determined.

Note: Every effort has been made in the preparation of this publication to provide the best available information. However, neither the American Chemistry Council, nor any of its employees, agents or other assigns makes any warranty, expressed or implied, or assumes any liability or responsibility for any use, or the results of such use, of any information or data disclosed in this material.

The definition of the CAB:

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 1912, it has been shown to provide a lead of two to fourteen 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.

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.

The CAB is designed and prepared in compliance with ACC’s Antitrust Guidelines and FTC Safe Harbor Guidelines; does not use company-specific price information as input data; and data is aggregated such that company-specific and product-specific data cannot be determined.

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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