|Industrial Production||LEI||Specialty Chemicals Index (SCI)|
Running tab of macro indicators: 6 out of 20
In the week ending 11 April, initial claims for unemployment were 5.25 million, slightly above expectations and off from 6.62 million the prior week. The data suggest a peak but beware of a next wave of layoffs. Some 22 million Americans have filed in the past four weeks, the equivalent of all of the jobs created since the end of the last recession (June 2009). The continuing claims data guarantees a double-digit unemployment rate nationwide and could even be higher than 20% in some states.
As the mandatory lockdowns started to take effect in mid-March, headline retail sales tumbled by a larger than expected 8.7% in March. It was the worst monthly decline in history and reflects the sudden sharp pullback in economic activity due to Covid-19 lockdowns across the country. There were double-digit declines across many categories including motor vehicles, gas stations, clothing & accessories, sporting goods, electronics & appliances, miscellaneous retailers, department stores, and, of course, restaurants. There were several categories that gained including food & beverages, health & personal care, building supplies & garden centers, and non-store retailers (which includes online platforms such as Amazon). Compared to a year ago, retail sales were off 6.2% Y/Y.
Import prices fell 2.3% in March, and follows a 0.7% decline the previous month. The March drop was driven by lower petroleum, natural gas, and other fuel prices. In March, lower prices for consumer goods and foods, feeds, and beverages offset higher prices for automotive vehicles, nonfuel industrial supplies and materials, and capital goods. U.S. export prices decreased 1.6% in March, after falling 1.1% in February. Overall import prices were off 4.1% Y/Y and export prices were off 3.6% Y/Y.
As expected, housing starts tumbled in March, down 22.3%, with declines in every region of the country. Single family starts also declined, by 17.5%. Forward-looking building permits also fell, by 6.8% (-12.0% for single family permits). Compared to a year ago, starts remained ahead 1.4% Y/Y while permits were up 5.0% Y/Y.
Homebuilder confidence plunged in April as stay-at-home orders across most of the country sapped interest in new home sales. The NAHB/Wells Fargo Housing Market Index fell a record 42 points to 30, reaching its lowest level since June 2012 when tax breaks for first-time homebuyers ended. The index’s three components: current sales conditions, sales expectations in six months and buyer traffic all dropped sharply.
With weakness across all three sectors, business inventories fell 0.4% to $2,012.7 billion at the end of February. The combined value of distributive trade sales and manufacturers’ shipments fell 0.5% to $1,464.2 billion. As a result, the overall business inventories-to-sales ratio was stable at 1.37. A year ago, the ratio was 1.39. Overall inventories were off 0.4% Y/Y and sales were up 1.4% Y/Y. This marks the last pre-coronavirus report.
Coronavirus-induced factory shutdowns and continuing supply chain disruptions caused the largest monthly drop (-5.4%) in industrial production since 1946. Mining and utility output fell and manufacturing output dropped by 6.3% with steep declines in every major segment. The largest declines were in motor vehicles & parts, furniture, textiles, printing, fabricated metal products and plastic & rubber products. Compared to a year ago, overall industrial production was off 5.5% Y/Y with manufacturing output down 6.6% Y/Y. Capacity utilization rates fell by 4.3 percentage points to 72.7% Y/Y, the lowest level since 2010. Industrial capacity was 1.9% higher than a year ago. The report clearly demonstrates the early impact of the sudden drop in economic activity from coronavirus containment efforts. As these efforts generally began during the latter half of the month, it is likely that output deteriorated further in April.
The New York Fed’s latest Empire State Manufacturing Survey reported that business activity plunged in April, with the headline general business conditions index plummeting 56.7 points to -78.2, its lowest level (by a wide margin) in the history of the survey. New orders and shipments declined at a record pace. Delivery times lengthened, and inventories fell. Employment levels and the average workweek both contracted at a record pace. Input price increases slowed considerably, while selling prices declined modestly. Although current conditions are ugly, firms expect conditions to be slightly better six months from now.The Business Outlook Survey prepared by the Philadelphia Federal Reserve indicated that activity in the region’s manufacturing sector continued weakening in regional manufacturing activity this month, with the measure of current activity falling 43.9 points to -56.6. New orders and shipments also fell sharply this month to long-term low readings, coinciding with ongoing developments related to the coronavirus pandemic. Employment and the average workweek, which had both remained positive last month, fell into negative territory this month. The firms expect the current easing of manufacturing activity to last less than six months, as the broadest indicator of future activity strengthened further from last month’s reading.
The index of leading economic indicators (LEI) fell 6.7% in March and follows a 0.2% decrease in February. The unprecedented and sudden deterioration in the index was broad-based and is the largest decline in its 60-year history. The sharp drop in the LEI reflects the sudden halting in business activity and suggests the U.S. economy will be facing a very deep contraction.
Federal Reserve Bank Beige Book In its survey of economic conditions around the U.S. the Federal Reserve reported that, “economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic. The hardest-hit industries—because of social distancing measures and mandated closures—were leisure and hospitality, and retail aside from essential goods. Most Districts reported declines in manufacturing, but cited significant variation across industries. Producers of food and medical products reported strong demand but faced both production delays, due to infection-prevention measures, and supply chain disruptions. Some other manufacturing industries, such as autos, mostly shut down. The energy sector, suffering from low prices, reduced investment and output. Districts reporting on loan demand said it was high, both from companies accessing credit lines and from households refinancing mortgages. All Districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months.”
The rig count continued to collapse during the week ending 9 April, down another 62 rigs to 600. An agreement among OPEC+ producers to cut 9.7 million BPD (roughly 10% of global oil production) in May and June caused oil prices to jump in the early part of the week. Prices drifted lower, however, on reports of record commercial inventory builds in the U.S. Natural gas inventories rose for a second week and inventories remain above five-year historic average.
For the business of chemistry, the indicators still bring to mind a red banner for basic and specialty chemicals
According to data released by the Association of American Railroads, chemical railcar loadings, the best ‘real time’ indicator of chemical industry activity, fell by 1,280 to 28,994 railcars during the week ending 11 April (week 15). Loadings were down 10.4% Y/Y, but still show a positive comparison to 2019 – up 1.6% on a year-to-date basis. Loadings have only been on the rise for only 4 of the last 13 weeks. The 13-week moving average, which is used to smooth out irregularities, remained up by 1.3% compared to last year.
Chemical import prices fell 0.3% in March, offsetting a 0.3% decline the previous month. The March weakness was widespread among all segments. U.S. chemical export prices decreased 0.4% in March, after falling 0.2% in February. Chemical import prices were off 3.8% Y/Y and chemical export prices were off 3.4% Y/Y
Chemicals production fell 3.8% in March with broad-based weakness among segments. The only segments to improve were consumer products (segment producing sanitizers, cleaners, soaps, etc.), dyes and pigments, and alkalies and chlorine as well as pharmaceuticals further downstream. Production was off 3.4% Y/Y. The decline in March output pushed the capacity utilization rate down 2.5 points to 77.4%. A year ago it was 82.9%.
With the effects of the coronavirus fully showing up in the U.S. economy, U.S. specialty chemicals market volumes fell 5.0% in March, accelerating from a 0.5% decline in February. As recently as January, activity improved. Of the 28 specialty chemical segments we monitor, only three expanded in March, down from 13 in February. Twenty-five markets declined in March. During March, large market volume gains (1.0% and over) occurred in cosmetic additives and flavors & fragrances. On a sequential (one-month change) basis, diffusion was 11%, off from 48% in February and 63% in January.
During March, the overall specialty chemicals volume index was off 4.4% on a year-over-year (Y/Y) basis. The index stood at 107.1% of its average 2012 levels in March. This is equivalent to 7.29 billion pounds (3.31 million metric tons). On a Y/Y basis, there were gains in only four market and functional specialty chemical segments. Compared to last year, volumes were down in 23 of the 28 segments, with one was flat compared to a year ago. On a year-earlier basis, diffusion was 16%, much worse than February.
Federal Reserve Beige Book – Chemical Industry Comments
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The banner colors represent observations about the current conditions in the overall economy and the business chemistry. For the overall economy we keep a running tab of 20 indicators. The banner color for the macroeconomic section is determined as follows:
Green – 13 or more positives
Yellow – between 8 and 12 positives
Red – 7 or fewer positives
For the chemical industry there are fewer indicators available. As a result we rely upon judgment whether production in the industry (defined as chemicals excluding pharmaceuticals) has increased or decreased three consecutive months.