Regulatory Burdens, Barbie and Taylor Swift Impact the Chemical Industry

The U.S. economy is in fairly solid shape, with reasonably good growth projected for the second quarter, driven largely by resilient consumer spending. However, growth in consumer spending is expected to downshift due to higher borrowing costs, depletion of excess savings and narrowing real wage growth, according to Martha Gilchrist Moore, chief economist at the American Chemistry Council (ACC). Moore offered an update on the state of the chemical industry for a Chemical Processing webinar in mid-June. She also mentioned that inflation remains sticky but is showing signs of improvement, with the core consumer price index running at 3.4%. The Fed is taking a cautious "higher for longer" approach, signaling potential rate cuts only after seeing concrete signs of inflation returning to 2%.

Consumer spending remains robust overall but is shifting from goods to services compared to the pandemic era.

“A few years ago, people were spending lots of money on things — dishwashers, exercise equipment, laptops, furniture. Now, people are spending a larger share of their budget on services,” said Moore. “There was a huge rebound, especially last summer. There was Taylor Swift, there was the Barbie movie, travel. People are going places, airplanes are full, people are eating out, but there's also a lot of spending on nondiscretionary items, things like rent and insurance and electricity. And all of these services obviously consume fewer molecules than the spending on goods, and that is one of the reasons that the chemical industry in particular has had a bumpy time.”

Moore tracks 18 end-use industries. Last year, 10 of those industries contracted. For 2024, 2025 and 2026 the prediction is only five of those industries will contract. Semiconductors, aerospace and motor vehicles are performing well. Industries like furniture, apparel and textile mill products will continue to see contraction – as will appliances, due to the housing market (see figure below).

Indeed, housing, an interest rate-sensitive sector, was among the first impacted when the Fed raised rates in 2022. Housing starts declined for two years to 1.41 million in 2022. Only a modest increase to 1.42 million is expected amid persisting high interest rates. The prevalence of 30-year fixed-rate mortgages in the United States exacerbates the impact of higher rates, creating affordability challenges and limiting mobility, though some support comes from new home demand.

ACC’s Economic Sentiment Index, which queries the association’s member companies on their assessment of their U.S. business, showed positive signs, with most members reporting expansion in new orders, production levels and capacity utilization in Q1, despite higher input and labor costs. Capital spending also turned positive. Inventory levels are becoming more balanced after a period of increases. However, regulatory burdens continue rising, with 58% seeing an increase in Q1 and two-thirds expecting further increases over the next six months. After a 1.3% volume decline in 2023 due to destocking, a modest 2.4% gain is projected for 2024, led by basic and agricultural chemicals. Growth is expected to be weaker in consumer products and specialty chemicals tied to uneven manufacturing recovery. Long-term prospects are supported by new manufacturing capacity and positive energy fundamentals. (See figure below).

“One of the things that makes me optimistic for the chemical industry going forward is this resurgence of manufacturing in the United States,” said Moore. “We saw during COVID the real supply-chain vulnerabilities of going abroad for all of these materials. So, there's been some domestic reshoring or nearshoring to Mexico.”

Recent legislation is also a source of optimism, according to Moore. Incentivizing sectors like clean tech, infrastructure and semiconductors through legislation like the Bipartisan Infrastructure Law, Inflation Reduction Act and CHIPS Act are bright points. This manufacturing construction boom, particularly in computer, electronics and electrical equipment to support data centers and AI, will drive demand for the 500+ chemicals required in semiconductor production and create opportunities for the chemical industry as this condensed North American manufacturing hub emerges.

“There's been a huge demand recently for data warehousing, and as the artificial intelligence starts to get built out, the amount of electrical equipment required to run the data centers is phenomenal — and all of that requires chemistry,” said Moore. (See figure below).