First the good news: the US economy will continue to grow in the new year, even though the expansion is getting long in the tooth. Now, the bad news: gains will continue to be tepid, according to the American Chemistry Council's monthly Chemical Activity Barometer (CAB).
According to the ACC, The Chemical Activity Barometer has shown to lead US business cycles by an average of eight months at cycle peaks, and four months at cycle troughs. The barometer, logging in at 93.6, rose 0.1% over October on a three-month moving average (3MMA) basis. Following slight downward revisions for September and October the CAB remains up 2.8% over a year ago and is still at its highest point since June 2008.
"The clock is ticking for Congress to strike a budget deal before we face another potential government shutdown, but so far, the U.S. economy is not showing any signs of concern," noted Dr. Kevin Swift, chief economist, ACC. "We've seen some moderation in growth, but production-related indicators have improved, equity prices remain strong, and U.S. exports are recovering as the recession in Europe finally ends," he said. "All of this points to steady and disciplined growth for the coming year," he added.
In the run up to the holiday season, retail sales have remained healthy, showcasing the correlation between sales and the consumption of polyethylene resins used in packaging. With real incomes rising, employment improving, and affiliated wealth effects, there is room for additional growth in this sector, according to Swift.
The CAB is a leading economic indicator derived from a composite index of chemical industry activity. The ACC says that the chemical industry consistently leads the US 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 three months. The median lead was also 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.