The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com), rose 0.4 percent in May on a three-month moving average (3MMA) basis, the third monthly gain after several weak months. On a year-over-year (Y/Y) basis, the barometer is up 0.5 percent (3MMA).
The unadjusted measure of the CAB retreated 0.2 percent in May, with weakness centered in equity prices, and rose 0.7 percent in April, ACC says. The diffusion index was steady at 65 percent in May. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for April was revised upward by 0.27 points and that for March by 0.13 points.
“Year-earlier comparisons have turned positive in recent months, and while trade tensions, slowing economic growth overseas, and soft economic reports in the U.S. have created uncertainty that has weighed on business investment, the CAB signals gains in U.S. commercial and industrial activity through mid-2019, albeit at a moderate pace,” said Kevin Swift, chief economist at ACC. “There is some possibility of improving activity in the closing months of the year.”
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 May were slightly positive. Trends in construction-related resins, pigments and related performance chemistry were mixed and suggest further slow gains in housing activity. Plastic resins used in packaging were positive, while those for consumer and institutional applications were mixed. Performance chemistry and U.S. exports were mixed. Equity prices dropped sharply this month, while product and input prices rose. 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.
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