The Chemical Activity Barometer, a leading economic indicator created by the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com), was up 0.1 percent in September on a three-month moving average (3MMA) basis following a 0.1 percent decline in August and gains averaging 0.2 percent per month during the second quarter. On a year-over-year (Y/Y) basis, the barometer was flat at 0.0 percent (3MMA).
The unadjusted measure of the CAB was up 0.6 percent in September following a 0.7 percent decline in August. The diffusion index rose to 67 percent in September. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for August was revised upward by 0.09 points and that for July by 0.34 points.
“Although one month does not make a trend, the positive September CAB reading and upward revisions in the data are encouraging signs,” said Kevin Swift, chief economist at ACC. “The barometer indicates gains in U.S. commerce into the second quarter of 2020, but at a slow pace.”
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 September were slightly positive. Housing activity rebounded sharply in August, while trends in construction-related resins, pigments and related performance chemistry were mixed, suggesting slow gains in housing activity. Plastic resins used in packaging and for consumer and institutional applications were mixed. Performance chemistry improved. U.S. exports were mixed, reflecting trade tensions, a high dollar and a weak global manufacturing environment. Equity prices rebounded 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. 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.