Economic Outlook: American Chemical Makers Fly Higher

Strength in key markets and feedstock advantages bode well for the industry

By Thomas Kevin Swift, American Chemistry Council

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The output of U.S. chemical manufacturers increased in 2016 and will expand further in 2017. Growth is happening even in the face of some serious economic challenges: fiscal uncertainty, a fall-off in business investment, an ongoing balancing in the oil-and-gas sector, weakness in key export markets, a high dollar, and a major slump in the domestic and global manufacturing sector. Fortunately, compared to producers in other parts of the world, American chemical makers retain advantages, thanks to access to cheaper and more-abundant feedstock and energy. As a result, significant capital investment is occurring in chemicals manufacturing in the U.S.

In the United States, the chemical industry is benefiting from the continuing strength of two of its important end-use markets — housing and light vehicles. Good levels of activity in both markets will support economic growth this year. Business investment will recover in 2017 and the manufacturing renaissance will regain traction, contributing to the building momentum for the American chemical industry. Eventually, a sustained global expansion will result in growing trade and increased exports of American goods.

However, overall growth of the U.S. gross domestic product (GDP) will rebound only slightly this year (Figure 1). The rebalancing in the oil-and-gas sector, with the concurrent decline in related investments, is a leading factor behind weak economic growth figures. Business investment and inventories typically are to blame for variations in the business cycle and, thus, we continue to monitor these parameters. Capital spending by business in the U.S. was weak during much of late-2015 and into 2016 but trends in new orders suggest a recovery of “animal spirits,” i.e., positive gut feelings, in this area. The need to enhance productivity and competitiveness will foster renewed business investment in 2017 and 2018. In the near term, consumer spending will lead U.S. economic growth; household deleveraging is largely over and consumer spending should strengthen with further improvements in the employment situation. Domestic economic growth remains below its potential because high taxes, debt, regulatory burdens and economic policy uncertainty took a toll on both business and consumer confidence.

Good Signs

The continuing rise in the Chemical Activity Barometer (CAB) of the American Chemistry Council (ACC) points to overall modest growth in the U.S. economy. The CAB is a composite index of economic indicators that track the activity of the chemical industry. (Data on the CAB appear in the Economic Snapshot in every issue of Chemical Processing.) Due to its early position in the supply chain, chemical industry activity leads that of the broader economy — thus, the CAB can portend turning points in the overall economy. Currently, the CAB is signaling continued growth in the U.S. economy through mid-2017. However, long-term growth in the economy will be muted due to factors such as demographics and policy. Tax and regulatory reform promised by the incoming Trump Administration could go far to rejuvenate U.S. economic dynamism and performance.

Light vehicles represent an important market for the chemical industry (nearly $3,500 per vehicle) and production has remained robust. U.S. light vehicle sales should stay near record levels in 2017, although down a bit from 2016 (Table 1). A robust labor market and favorable credit conditions will be offset somewhat by the dwindling of the pent-up demand that fueled sales over the past several years. That said, the odds are better that sales will beat rather than lag the forecast.

Housing also is a large consumer of chemicals (about $15,000 per start) and the outlook is for continued progress. Inventories are low as are interest rates; employment and wage gains will lead to improved household formations, the prime long-term driver for housing. Housing starts will rise from 1.16 million in 2016 to 1.29 million in 2017 and return to the long-term underlying demand pace of 1.5 million units per year by 2020.

Outside of the U.S., world trade is expected to revive in 2017 after lagging world GDP in 2015 and 2016. Global manufacturing, which softened during 2015 and 2016, also should strengthen in 2017. We are relatively optimistic about Europe but less so about Asia and Latin America. India will continue to grow at a stronger pace than China, which is suffering from problems such as overcapacity in manufacturing. Brazil and Russia should emerge from their two-year recessions. Overall, long-term global growth potential likely won’t be reached until after 2018.

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