Today, ACC released the September report of the Chemical Activity Barometer (CAB), our leading economic indicator derived from a composite index of chemical industry activity.
In the report, we noted that September’s uptick in growth follows a trend also observed in both 2010 and 2011 where we saw a strong upswing in the 4th quarter of the year, a gradual slowing of growth in the 1st quarter, followed by consecutive declining months into the 3rd quarter. We’re calling it the “Charlie Brown” effect.
The ‘Charlie Brown’ effect
First, let’s look at specific aspects of the trend we have seen each year for the last three years.
The U.S. economy begins the year on strong footing. Job creation is good, as are other indicators, and leading business leaders and consumers alike assert that the recovery has finally gained traction.
However, by the 2nd quarter, issues in the global economy begin to have a tangible impact in the U.S., like prompting rising gasoline prices, which eat into discretionary incomes and erode consumer sentiment.
We also see other economic indicators signaling a softening in the economy, as do rates of growth, which traditionally slow during this period. Job creation slows as well as sales, and then production. At this point in the cycle, the potential for a double-dip recession heats up popular debate.
By the 3rd quarter, the situation worsens and the talk of recession intensifies. Just when the chorus gets louder, the economy appears to re-engage in the 4th quarter — and then the pattern repeats itself.
At ACC, we analogized this situation to the old Charlie Brown comic strip where Lucy holds the football for Charlie but at the last moment as he goes to kick it, she removes it. Just as the 1st quarter discussion about economic recovery is finally gaining traction, the proverbial football (or recovery) disappears, hence the “Charlie Brown” effect.
What it means for our economy
If this trend continues, it is likely that job creation, income growth, growth of sales and growth of production will continue, but at a very slow rate.
For the purposes of building the CAB, ACC’s economics team reviewed U.S. business cycles from 1947 to the present day. We concluded that this is the weakest recovery we have witnessed to date. On the positive side, if this trend continues, we can expect inflationary pressures to remain muted given this slow rate of growth.
As demand slowed in the 2nd quarter, we saw production generally soften in the 3rd quarter as excess inventories are no longer needed. By this point, business and consumer sentiment has typically worn thin and overall confidence for economic recovery wanes. This pattern was widely reported and observed in 2010, 2011 and now again in 2012.
Other nations have observed the trend as well, most notably Europe, but also the U.S. during the 1930s and, to a lesser extent, during the last two so-called jobless recoveries.
There are no economic silver bullets or policy prescriptions, but in order for the “Charlie Brown” trend pattern to change, there must be greater certainty amongst policy makers, business leaders and consumers in the strength and potential of the economic recovery.
Our CAB currently suggests this slow growth pattern continuing into 2013, and the risks of another downturn still remain.
The chemical industry’s early position in the supply chain uniquely positions the CAB against other economic indicators. Applying the CAB back to 1947 shows that it leads the National Bureau of Economic Research (NBER) by two to 14 months, with an average lead of eight months. NBER is the organization that provides the official start and end dates for recessions in the U.S.
As we have seen, not only is the CAB able to provide valuable insight into critical areas of the U.S. economy and anticipate overall peaks and troughs, but it can also observe reoccurring multi-year economic cycles seemingly unaffected by individual or localized economic activities.
To date, the CAB has been covered by The Wall Street Journal, Financial Times, Reuters and Bloomberg, and many trade publications.