US chemical activity index rises sharply as outlook for business improves

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), jumped 0.7% in May, as measured on a three-month moving average (3MMA). 

Reaching an index of 99.3, last seen in November 2007, the CAB remains up 3.3% over a year ago, and suggests gains in business activity now will continue into 2016.  

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. Inventories, product prices, and equity prices all improved over last month.

The Chemical Activity Barometer is a leading economic indicator derived from a composite index of chemical industry activity, according to ACC officials. The chemical industry has been found to consistently lead the US 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 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 re-based 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.