The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com), fell 0.1 percent in August on a three-month moving average (3MMA) basis, following a similar drop in July and four months of gains. On a year-over-year (Y/Y) basis, the barometer was flat at 0.0 percent (3MMA).
The unadjusted measure of the CAB fell 0.5 percent in August after a 0.1 percent gain in July. The diffusion index was 59 percent in August. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for July was revised upward by 0.58 points and that for June by 0.62 points.
“A pattern of fluctuating CAB readings – months up followed by months down – indicates late-cycle activity,” said Kevin Swift, chief economist at ACC. “The barometer signals gains in U.S. commerce into early 2020, but at a slow pace, while rising volatility suggests change may be coming.”
The CAB has four main 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 in August were slightly positive. Trends in construction-related resins, pigments and related performance chemistry were slightly positive and suggest slow gains in housing activity. Plastic resins used in packaging and for consumer and institutional applications were also slightly positive. Performance chemistry was soft and U.S. exports were mixed. Equity prices dropped this month, as did product and input prices. Inventory and other indicators were positive.
The 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 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.