Economic growth in the United States remained dynamic at the end of 2018 with gains in manufacturing double what they were a year ago. However, all the world’s other major economies have slowed, ending a rare period of synchronized expansion.
In the United States, business investment is on the rise and domestic oil and natural gas production continue to reach new heights. Improvement in major end-use markets is setting the stage for gains in U.S chemical production during 2019. U.S. chemical manufacturers remain advantaged, with access to cheaper and more abundant feedstock and energy. This has resulted in sizable capital investment in U.S. chemical production capacity. As these investments have been coming online, chemical production volumes, particularly in basic chemicals, continued to improve in 2018, with significant boosts expected in 2019 and 2020.
The Macro Economic Outlook
In the United States, gross domestic product (GDP) grew 2.9% during 2018. Improving business investment combined with strong consumer spending aided GDP growth. In 2019, growth should decelerate to a 2.6% pace, with a further slowing in 2020 and 2021. Factors such as demographic and policy changes should restrain long-term growth in the economy. However, the U.S. chemical industry will be a source of strength as its customer industries and emerging markets improve and as the effects of enhanced feedstock competitiveness bolster growth.
The recovery in the oil and gas sector — and the concurrent improvement in related investments — was a leading factor behind 2018’s stronger economic growth figures. With the recent decline in oil prices, investment may slow in 2019. In addition, rising trade tensions are weighing on business and consumer confidence. The tax reforms enacted at the end of 2017 created a more favorable environment for business investment, which was robust during 2018. The need to enhance productivity and competitiveness will foster continued gains in business investment in 2019 and 2020. U.S. economic growth also reflects strength in consumer spending. Since the end of the recession, growth remained below its potential as high taxes, debt, regulatory burdens and economic policy uncertainty undermined both business and consumer confidence. In 2017 and 2018, this changed for the better as policy reforms were implemented. However, rising uncertainty over trade policy could create headwinds.
The trend shown in the Chemical Activity Barometer (CAB) of the American Chemistry Council (ACC) points to modest growth in the U.S. economy. The CAB is a composite index of economic indicators that track the activity of the chemical industry. Due to its early position in the supply chain, chemical industry activity leads that of the broader economy, so the CAB provides an indication of potential turning points in the overall economy. Currently, the CAB is signaling continued — albeit moderating — growth in the U.S. economy through the 3rd quarter of 2019 (Figure 1). As already mentioned, demographics and policy will mute long-term growth in the economy but tax reform and regulatory rebalancing will go far to support U.S. economic dynamism and performance.
Outside the United States, the synchronized upswing among major and regional economies is unraveling (Figure 2). World trade volumes rose 4.5% in 2018 but tariff and other trade policy tensions present formidable risks. Global manufacturing, which rebounded in 2017, moderated in 2018. Europe clearly has slowed and the outlook for Asia has weakened as well. However, Latin America may be recovering. Growth in India will continue to outpace that of China, which is suffering from problems such as overcapacity in manufacturing. Overleveraging in China remains a concern, as does mounting trade tension. Although growth in the global economy reached its long-term trend, the next several years present many challenges.
Domestic Production Dynamics
U.S. industrial output was on a roll in 2018, up by 3.7%, about double the 2017 pace after back-to-back years of decline due to weak export markets, a high dollar, and fallout from the collapse in oil prices. With economic growth around the world decoupling and rising trade tensions, the global appetite for U.S. exports may abate. Renewed investment in oil and gas and housing has stimulated production through related supply chains. The recovery in business investment also has led to broad-based gains across multiple manufacturing industries. Industrial output should moderate slightly in 2019 and 2020, with growth of 2.7% and 2.2%, respectively.
Light vehicles represent an important market for the chemical industry (more than $3,250 per vehicle). U.S. light vehicle sales edged lower to 17.1 million units in 2018 and will ease further to 16.8 million in 2019 (Figure 3a). While continued job and income gains are positive factors, they can’t compensate for the loss of pent-up demand, now largely satisfied, that fueled vehicle sales in recent years. Furthermore, credit issues are starting to emerge. The outlook is for sales to remain at slightly lower but still elevated levels over the next several years.