|ISM Manufacturing (to 47.8%)||Chemical Employment||Chemical Shipments (to $44.07B)|
Running tab of macro indicators: 13 out of 20
The much-anticipated jobs report suggests that the U.S. labor market remained firm in September. Nonfarm payroll employment rose by 136,000, slightly lower than expectations, but enough to absorb more unemployed into work. The unemployment rate fell to a 50-year low of 3.5%. In addition, job gains in July and August were revised higher. Over the past three months, job gains have averaged 157,000, a slower pace than earlier in the year. As expected, manufacturing employment declined for the first time in six months, by 2,000, as that segment of the economy struggles amid trade tensions and weak demand abroad. Retail employment continued to decline, but most other segments reported higher employment for the month.
Led by higher demand for domestic vehicles, light vehicle sales rose slightly to a stronger-than-expected 17.2 million unit pace in September. SUVs, light-duty trucks and crossovers continue to dominate. Sales during the third quarter averaged a 17.0 million unit pace, the same as the second quarter and slight improvement from the first quarter. That said, sales have peaked for this cycle but remain at elevated levels due to low interest rates, employment gains, and rising incomes.
Construction spending edged higher by 0.1% in August, following essentially flat growth in July. Privately-funded construction was flat for the month as gains in new single family residential spending offset declines in multifamily and non-residential. Spending on publicly-funded projects continued to gain. Compared to a year ago, construction spending was off 1.9%.
Factory orders eased 0.1% to $499.8 billion in August, a level off 1.0% Y/Y. The details were mixed and orders for non-defense capital goods excluding aircraft (a core measure and proxy for business investment) fell 0.4% after flat activity in July and a 0.9% gain in June. Clearly, trade tensions are playing a role in creating uncertainty and dampening business investment as core orders are off 7.0% Y/Y. August gains in primary metals, fabricated metal products and machinery were offset by weakness elsewhere. Shipments eased and inventories were flat.
The nation’s trade deficit expanded by $0.9 billion to $54.9 billion in August. Exports rose by $0.5 billion, but imports were $1.3 billion higher. Exports of industrial supplies and foods, feeds & beverages increased, offsetting a decline in capital goods exports (led by lower aircraft exports). Gains in the imports of consumer and capital goods offset declining imports of industrial supplies and materials.
The ISM PMI fell 1.3 points to 47.8% in September, a deepening pace of contraction and one that has become widespread as only three of the 18 industries grew during the month. In addition, the current reading is at its lowest level in 10 years, the end of the last recession. Virtually all sub-components (new orders, production, employment, order backlogs, export orders, etc.) were in decline. The global manufacturing contagion has clearly spread to the United States. Turning to non-manufacturing, the ISM NMI fell 3.8 points to 52.6. This is was a larger-than-expected decline and a disappointment, leaving the index at its lowest level since 2016. Clearly, the contagion in manufacturing is spreading. Large declines in business activity and new orders and employment was at near stalling speed. Thirteen of the 18 industries reported growth.
The global manufacturing sector was its fifth month of weakness in September with the J.P.Morgan Global Manufacturing PMI™ rising 0.2 points 49.5, a little closer to stabilization. The headline production measure was at a stable 50.0 reading but new orders, exports, and employment are contracting. Trade tensions and geopolitical uncertainty are weighing on business capital investment. This is the main drag on global industry although future growth prospects remain favorable. For the first time in years, the U.S. measure was below the global measure.
With gains in most regions (sans Europe), global semiconductor sales rose 2.5% to $34.2 billion in August. At 4.1%, the Americas experienced the largest monthly gain. Sales are down 15.9% Y/Y and year-to-year sales decreased across all major markets. The Americas experienced the largest yearly decline, at 28.8% Y/Y.
Manufacturing activity continued to slow in Texas during September. The Texas Manufacturing Outlook Survey index of general business activity fell 1.2 points to +1.5. This suggests manufacturing continued to expand, but at a slower pace. Indicators of production, capacity utilization, new orders, and shipments all pointed to slower growth. Employment growth, however, accelerated. Inventories continued to contract at a slower pace. Looking ahead over the next six months, manufacturing conditions are expected to deteriorate with the future business activity index falling 8.2 points to -6.8.
The oil and gas rig count fell for a sixth consecutive week, by seven to 859 rigs. The attack on Saudi Arabian oil processing facilities last month removed nearly 6% of global supply but have done little to affect oil market sentiments and prices. After jumping nearly $10 per barrel after the attack, oil prices have now eased to a level less than what they were prior to the attack. Amid a slowdown in global economic activity, fears of slumping demand have weighed on markets. For more than three decades after the first oil price shock in the mid-1970s, news of such an attack would have generated angst among market participants, policymakers, and business in general. The angst this time was minimal. Such is the power of the unconventional oil and gas revolution.
For the business of chemistry, the indicators bring to mind a green 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, rose by 2.3% to 33,014 railcars during the week ending 28 September (week 39). Loadings were down 0.1% Y/Y, down 0.2% YTD/YTD and have been on the rise for 7 of the last 13 weeks. The 13-week moving average, which is used to smooth out irregularities, is down 0.3% Y/Y.
The benchmark S&P 500 index rose by 1.7% in September. Chemical equity prices, as measured by the S&P index, for chemical companies also rose (by 3.7%). Equity prices are often a good indicator of future activity and represent one component of the leading economic indicators. Compared to the beginning of the year, chemical equities were ahead 13.7% while the S&P 500 index was up by 18.7% year-to-date.
The details of the ISM report indicate that the chemical industry was one of the three that expanded in September. New orders, production, employment, all expanded while order backlogs, imports, and export orders contracted. Supplier delivery times were stable and customer inventories were deemed too low. One chemical industry respondent noted, “Continued softening in the global automotive market. Trade-war impacts also have localized effects, particularly in select export markets. Seeing warehouses filling again after what appeared to be a short reduction of demand.”
Chemical industry employment (including pharmaceuticals) rose by 2,000 to 860,000. Production and non-supervisory workers rose by 200 so most of the gain was in other functions. Hours worked remained stable but with a higher number of workers, hours worked rose and, allowing for productivity gains, it’s likely that productive activity gained, which reinforces the ISM report. Average hourly wages were $25.29 per hour in September, essentially flat on a Y/Y basis. Overall employment was up by 18,400 jobs (2.2%) since last year.
Chemical industry shipments rose0.2% to $44.07 billion in August, a level off 0.4% Y/Y. Gains were widespread among reporting segments. At the same time, inventories fell 0.4% to $53.45 billion, pushing the inventory-to-sales ratio down to 1.21 months’ supply. A year ago, the ratio was 1.20.
Construction spending for chemical manufacturing projects rose by 3.3% in August to a $28.8 billion annual pace. Chemical construction spending accounted for 40.2% of spending in the broader manufacturing sector. Compared to a year ago, spending was up 3.2%. Chemical industry construction spending has expanded rapidly since 2010 which reflects new building to take advantage of shale resources.
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Following Canada and Mexico, China is the third largest destination for US chemicals exports. China had been a rapidly growing customer market for US-based chemicals until the U.S. government began imposing additional tariffs on imports of products from China as part of the Section 301 trade actions. The Chinese government imposed retaliatory tariffs on US exports in return and as a result, growth in Chinese demand for US chemicals and plastics has declined considerably. In recent years, approximately 37% of US chemicals exports were to related parties in China and as a result, the additional tariffs have led to supply chain disruptions. ACC estimates that nearly 86% of US chemical imports and 100% of plastic products imported from China will be covered by additional tariffs by the end of this year. Nearly 91% of chemicals exports and as much as 100% of US plastic products exports to China will be covered by retaliatory tariffs by the end of the year. The chart herein displays ACC’s latest assessment of the tariff coverage.
ACC estimates that nearly 86% of U.S. chemical imports and 100% of plastic products imported from China will be covered by additional tariffs by the end of this year. Nearly 91% of chemicals exports and as much as 100% of U.S. plastic products exports to China will be covered by retaliatory tariffs by the end of the year. The chart herein displays ACC’s latest assessment of the tariff coverage. ACC has estimated that China’s retaliatory tariffs alone would lead to a significant loss in demand for U.S. chemicals, putting an estimated 55,000 jobs and $18 billion in U.S. economic output at risk. Indeed, as additional Chinese tariffs were imposed, U.S. exports to China fell off significantly. ACC estimates that U.S. exports of chemicals to China dropped off by 24 percent in the 4th quarter of 2018 on a year-over-year basis and comparisons have been negative ever since.
“Inventing a Better Now”
Dr. Stéphane Bazzana – Global Director of Innovation, DuPont Safety &
Société de Chimie Industrielle
16 October 2019
The Yale Club
New York, NY
The Global Petrochemical Industry Workshop – Understanding the Complex Interactions Between Technology, Economics and Markets
22 – 24 October 2019
DoubleTree by Hilton Hotel & Suites
7th ICIS US Butadiene and Derivatives Conference
11 December 2019
Park Central Hotel
New York, NY
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.