The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com), and released today, continued to see an easing of growth this month, with a 0.1 percent gain over August as measured on a three-month moving average (3MMA). Growth for the third quarter stands at an average monthly gain of 0.2 percent compared to the strong 0.5 percent monthly average during the first half of the year. Despite the softening pace, the September CAB marked a string of consecutive gains going back to July 2012. Though the pace of growth has slowed, current gains have the CAB up a healthy 3.9 percent over this time last year, and the barometer remains at its highest level since January 2008.
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 August, the components were mixed, with production flat, equity prices and inventories up, and product prices down.
Though the production indicator was flat in September, construction-related coatings, pigments and other performance chemistries remained strong, despite last week’s weak housing report. Chemical equities were up sharply this month, continuing to outpace the broader market. New orders and inventories improved in September but at a slower pace than earlier months.
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.