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Uncertainty About Energy Dogs US Chemical Sector



Published July 22, 2014
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Uncertainty About Energy
Dogs US Chemical Sector

Uncertainty in global energy markets is having a drag on chemical activity, according to the American Chemistry Council. The Chemical Activity Barometer (CAB), a leading economic indicator created by the ACC posted a 0.4% increase over June, as measured on a three-month moving average (3MMA). The pace of growth was consistent with earlier growth logged in the second quarter, according to the ACC. Year over year growth now stands at a 4.4% increase. Uncertainty in global energy markets kept the non-adjusted barometer at a slow 0.1% gain in June, but provisional data suggest there is room for further expansion in coming months.

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 July production-related indicators were up, as were product/selling prices, and inventories. After rebounding sharply in May, chemical equity prices have weakened in response to the growing unrest in the Middle East and Ukraine.

According to CAB data, unlike earlier readings, trends in construction-related chemistries suggest a lackluster market for this sector, which includes plastic resins as well as adhesives and sealants, construction chemicals, paint additives, and other performance chemistries. Pigments are faring better, as are plastic resins used in consumer product applications. Continued strength in electronic chemicals is encouraging, as the semiconductor industry's early place in the supply chain makes it a bellwether of the industrial cycle. Gains in oilfield chemicals suggest that the boom in unconventional oil and gas will continue to progress, contributing to the overall growth of the US economy.

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 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 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.


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