Many manufacturers in the U.S. are frustrated that they don’t have enough visibility into their future orders. Just ten years ago they could count on their large customers providing annual program volume estimates. Now many are lucky to get 6 weeks. When your sales reps can’t give you reliable forecasts, it makes sense to start looking at more broadly based economic indicators. We think the The Chemical Activity Barometer (CAB) looks like a good place to start.
The CAB is a leading economic indicator created by the American Chemistry Council (ACC). It increased 0.2 percent this month, following a 0.1 percent slide in December, as measured on a three-month moving average (3MMA). Accounting for adjustments, the CAB remains up 3.6 percent over this time last year.
The Chemical Activity Barometer 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 provides a more consistent and illustrative picture of national economic trends. Unlike economic indicators that monitor purchasing intentions or output trends, the chemical activity barometer uses a measure of raw materials and important manufacturing process inputs to draw conclusions. Raw material inventory levels are at lower levels compared to a generation ago due to improved supply chain information technology and advanced manufacturing practices such as Kanban/Just-In-Time. As a result, input purchasing correlates directly to manufacturing output, rather than stockpiling.
The Chemical Activity Barometer has four primary components, each consisting of a variety of indicators:
1) Production
2) Equity prices
3) Product prices
4) Inventories and other indicators
January's components were mixed: production and equity prices were up, product prices were down and inventories continued to improve.
Applying the CAB back to 1919, it has been shown to provide a longer lead (or perform better) than the National Bureau of Economic Research, by two to 14 months, with an average lead of eight months at cycle peaks. 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 2007 was used) of a reference time series. The latter is the Federal Reserve's Industrial Production Index
The CAB comprises indicators relating to the production of chlorine and other alkalies, pigments, plastic resins and other selected basic industrial chemicals; chemical company stock data; hours worked in chemicals; publicly sourced, chemical price information; end-use (or customer) industry sales-to-inventories; and several broader leading economic measures (building permits and new orders). Each month, ACC provides a barometer number, which reflects activity data for the current month, as well as a three-month moving average. The CAB was developed by the economics department at the American Chemistry Council.