The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com), eased 0.2 percent in July on a three-month moving average (3MMA) basis following three months of gains in March-May and weak months in the winter. On a year-over-year (Y/Y) basis, the barometer fell 0.2 percent (3MMA).
The unadjusted measure of the CAB rose 0.2 percent in July and fell 0.4 percent in June. The diffusion index rose to 65 percent in July. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for June was revised downward by 0.39 points and that for May by 0.09 points.
“A pattern of fluctuating barometer readings – months up followed by months down – indicates late-cycle activity,” said Kevin Swift, chief economist at ACC. “The CAB reading continues to signal moderate gains in U.S. commercial and industrial activity through late 2019, but rising volatility suggests change may be on the way.”
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 June were slightly positive, ACC says. Trends in construction-related resins, pigments and related performance chemistry were mixed and suggest few gains in housing activity. Plastic resins used in packaging and for consumer and institutional applications were positive. Performance chemistry was positive and U.S. exports were mixed. Equity prices slipped 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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