from the American Chemistry Council

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), fell 5.4 percent in May on a three-month moving average (3MMA) basis following a 5.4 percent decline in April. On a year-over-year (Y/Y) basis, the barometer fell 12.4 percent in May. 

The unadjusted May data shows a 0.3 percent decline following a 6.3 percent drop in April and an 8.9 percent decline in March. The diffusion index fell from 35 percent to 29 percent in May as production declines became more widespread. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The April CAB reading was revised upward by 0.37 points and the March reading was revised downward by 0.08 points.

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.

Production-related indicators generally declined in April. Trends in construction-related resins, pigments and related performance chemistry were generally negative. Plastic resins used in packaging and for consumer and institutional applications were mixed. Performance chemistry was negative and U.S. exports were weak. Equity prices are improving. Product and input prices were negative. Inventory and other supply chain indicators were negative. Production-related indicators declined in May. Trends in construction-related resins, pigments and related performance chemistry were negative, as were resins used in appliances, light vehicles, machinery and other durable goods. Plastic resins used in packaging and for consumer and institutional applications were mixed. Performance chemistry was negative and U.S. exports were weak. Equity prices are improving and product and input prices are firming. Inventory and other supply chain indicators were negative.

Per Kevin Swift, chief economist at ACC:

The May CAB reading is consistent with a recession, but given the small unadjusted decline of only 0.3 percent, one that may bottom out.

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.