Chemical Activity Hits A New High

by: Calafia Beach Pundit

For almost 100 years, The American Chemistry Council has been publishing their "Chemical Activity Barometer." The index rose 3% in the year ending a few days ago, and reached a new all-time high in the process. As the charts below show, this index has reliably tracked the performance of the overall economy and, in particular, it has been a good leading indicator of industrial production, which has been noticebly weak for the past 18 months. (See more details in my June '16 post on the subject here.)

This close-up look at the performance of the index highlights its strength in the past several months, and the fact that it finally exceeded its 2007 peak, which occurred six months before the economy entered the Great Recession.

The chart above gives you a longer-term perspective on the behavior of the index, which invariably turns down in recessions (often in advance of recessions), and invariably rises during recoveries. It would appear that the recent behavior of the index points to stronger growth than is widely perceived to be the case.

The chart above compares the year over year change in the 3-mo. moving average of the Chemical Activity Index with the equivalent change in the level of Industrial Production. The Chemical index invariably moves in advance of move in Industrial Production. If this relationship holds, the market is going to be surprised at the new-found strength in Industrial Production in the months to come. We've been waiting for evidence that sharply lower energy prices will result in a boost in non-energy sectors of the economy, and this suggests that the evidence should be forthcoming before too long.

To be conservative, the strength in the Chemical Activity Index suggests that at the very least, a recession is not on the near-term horizon, and that the economy should prove to be at least a bit stronger, in the months to come, than the market is expecting.

Truck tonnage in June was a bit weaker than in May, but as the chart below suggests, it remains on an upward trend. Both chemical activity and truck tonnage are good measures of the physical size and growth of the economy, and both suggest the economy continues to make progress.