Chemicals Flash U.S. Economic Slump Warning: Chart of the Day

Slowing production of chemicals from caustic soda to polyvinyl chloride is signaling a drop in U.S. industrial output and greater risk that the economy may slip back into a recession, American Chemistry Council data show.

The CHART OF THE DAY shows the Chemical Activity Barometer trailing behind the Federal Reserve’s Industrial Production index by the most since March 2009, when the U.S. was still in the longest and deepest recession since the Great Depression. The gauge tracks chemical production and prices, hours worked at producers, manufacturing output, building permits, and share prices for companies including Dow Chemical Co. (DOW) and DuPont Co.

Falling chemical demand historically precedes drops in industrial output and broader economic slowdowns by about three to eight months, according to ACC Chief Economist Kevin Swift, who created the index. About 96 percent of manufactured goods are derived in part from materials produced by the $760 billion U.S. chemical industry.

“We’re early on in the supply chain,” Swift said. “The outlook for the economy is slowing during the next six to nine months and will be sub-par.”

The Washington-based group’s barometer has slumped 2.5 percent in three months, falling to a 2012 low of 88 in June from a one-year high of 90.3 in March. Three-month declines of 3 percent or more have preceded all but one recession since the beginning of the index’s data in 1947, according to Swift.

Caustic soda is used in pulp, paper and soap. Polyvinyl chloride is used in plastic pipe, vinyl siding and window frames. The chemicals gauge also tracks production of chlorine, soda ash, titanium dioxide, and plastic resins such as polyethylene and polypropylene. It incorporates industry inventories, the number of U.S. building permits issued and the Institute for Supply Management’s index of new orders.

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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