The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com), fell 0.4 percent in October on a three-month moving average (3MMA) basis following stable activity during the third quarter. On a year-over-year (Y/Y) basis, the barometer was off 0.5 percent (3MMA).
The unadjusted measure of the CAB for October showed a 0.7 percent decline, ACC says. The diffusion index fell to 47 percent in October – the first time since May 2016 that it was below 50 percent. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for September was revised downward by 0.44 points and that for August by 0.25 points.
“The CAB signals a pronounced slowdown in U.S. commerce through the second quarter of 2020,” said Kevin Swift, chief economist at ACC.
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 October were mixed. 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 mixed, suggesting headwinds for the consumer. Performance chemistry eased, reflecting the global manufacturing slowdown. U.S. exports were mixed, equity prices slumped and product and input prices fell. Inventory and other indicators were positive.
The CAB is a leading economic indicator derived from a composite index of chemical industry activity. Due to its early position in the supply chain, chemical industry activity has been found to consistently lead the U.S. economy’s business cycle, and this barometer can be used to determine turning points and likely trends in the broader economy. Month-to-month movements can be volatile, so a three-month moving average of the CAB reading 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 14 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.