CHARLOTTE, North Carolina (ICIS)–Challenging
economic conditions continue to be in store for
the US chemical industry with weakness in the
industrial sector in particular.
Starting with the production side of the
economy, the March ISM US Manufacturing
Purchasing Managers’ Index (PMI) registered
46.3, down 1.4 points from February and pushing
the index into its fifth month of contraction.
New orders and order backlogs fell back even
further into contraction territory. Production
contracted at a slightly milder pace. Measures
of supply chain bottlenecks improved, and
prices
paid turned negative again.
Meanwhile, the ISM US Services PMI dropped 3.9
points to 51.2, a level indicating a slowing
expansion.
The Manufacturing PMI for Canada fell back into
contraction during March while that for Mexico
featured a second month of expansion. Euro area
manufacturing has been in contraction for nine
months, the result of an energy shock and other
supply chain issues arising from the war in
Ukraine.
China was at breakeven levels, and other Asia
PMIs were mixed. Moreover, Brazil’s
manufacturing contracted for its fifth consecutive
month in March.
Turning to the demand side of the economy,
light vehicle sales fell for a second
consecutive month in March after the sharp
rebound in January. Inventories remain low.
After light vehicle sales fell from 15.0m in
2021 to 13.7m in 2022 due to semiconductor
shortages, economists see light vehicle sales
rebounding to 14.9m units this year before
improving to 15.4m in 2024. Pent-up demand will
provide support for the auto sector. The latest
cyclical peak was 17.2m in 2018.
Homebuilder confidence improved slightly but is
still in negative territory. Housing activity
has declined since last spring, and the March
report indicates the slide continues.
Economists project housing starts will fall
from 1.55m in 2022 to around 1.20m in 2023 and
2024 before recovering in 2025.
Retail sales volumes were weak in March, with
softness across categories. Sales at food
services and drinking places advanced. Spending
for services is holding up better than spending
for goods.
The unemployment rate remains at low levels as job creation continues.
There are 1.7 vacancies per unemployed worker,
which is still fostering wage pressures. There
are, however, signs of slowing job gains.
Consumer goods prices are further deflating. On
the other hand, Consumer Price Index (CPI)
services inflation remains sticky. In some
service industries, rates haven’t peaked at
all, but continue to rise.
Prices are now up 5.0% year on year (versus up
8.9% on the same basis in June 2022), but
downward progress has been slow. Economists
expect inflation to average 4.3% this year,
down from 8.0% last year. Inflation is expected
to soften to 2.5% in 2024 and 2.3% in 2025.
With services inflation still persistent, the
consensus seems to be that the Federal Reserve
will likely hike the Federal Funds target rate
by 25 basis points at the May FOMC meeting.
Disinflation is proceeding slower than
anticipated, and the Fed’s quantitative
tightening (QT) campaign continues.
The Fed’s survey of senior lending officers
indicates that banks are tightening credit, and
the recent banking turmoil indicates that it
will tighten further and dampen economic
activity. Problems with commercial real estate
present a risk.
The ICIS US Leading Business Barometer (LBB)
has provided a signal consistent with
recessionary conditions, but recent readings
indicate some stabilisation in this leading
index.
For US GDP, after rising 5.9% in 2021 on the
strong recovery from the COVID recession and
slowing to a 2.1% gain in 2022, economists’
forecasts are for subdued gains in 2023 and
2024 GDP of 1.0% and 0.4%, respectively, making
both years challenging. In 2025, US GDP is
projected to improve to 2.5%.
