Update on the economy, energy and chemicals
Our US leading business barometer (LBB) declined from February through November, but the December provisional reading was stable. This is encouraging but the overall pattern this year have signaled conditions consistent with a US recession. The former ACC CAB leading indicator was based on the LBB. Our related barometer of US inflation indicates that inflationary pressures have peaked for now. That said, inflation will remain elevated in the near-term. Our global leading business barometer is still signaling conditions consistent with a global recession.
A potential energy crisis, reductions in household incomes due to inflation, tightening of financial conditions, business uncertainty, and a slowdown in China are factors leading to slower global economic growth and a dimmed outlook for 2023. Several nations (and regions) could fall into recession and a global recession is possible. Europe has faced a severe economic shock this year as energy (both oil and natural gas) prices surged, a spillover from the war in Ukraine. Both business and consumer confidence has fallen and along with falling real incomes, this is causing consumers to cut back on spending and is giving rise to a recession. Japan will likely avoid recession but a soft global outlook makes for a dim export outlook. India’s GDP growth will remain among the strongest in the world. Despite rising inflation and an uncertain outlook for exports, domestic demand will support economic growth. A slowing economy and political uncertainty cloud the outlook for Brazil.
In the United States, the decline in housing continues. In contrast, the semiconductor shortages and other supply chain headwinds plaguing light vehicles have largely been resolved. Inventories, however, remain low compared to historical levels and support still high vehicle values, which affects affordability. Economic headwinds (low consumer confidence, tightening credit, etc.) are now presenting challenges although pent-up demand and fleet purchases could provide some support. Industrial production has gradually slowed since earlier in the year amid softening demand among end-use markets. A high dollar (and weak global economy) has hampered exports and inventories have risen in many industries.
Our forecast for the US economy in 2023 is for a 0.3% decline in real GDP, off from 2.0% this year and 5.9% in 2021. By 2024, growth should rebound to nearly 1%. Inflation is falling back but will likely remain elevated.
Specialty & Fine Chemicals
US market volumes for specialty & fine chemicals have been generally increasing through 3Q but changes were underfoot in 4Q. October saw stalled activity and November saw volumes fall back 0.2%. The retreat left overall volumes at 3.65 million metric tons (or 8.05 billion pounds), a level well above the pre-Covid peak. Of the 30 segments we monitor, however, only 10 expanded in November, down from 15 in October and 22 in September. During November only three segments -- agrochemical intermediates, construction chemicals, and printing ink -- featured gains of 1.0% or more.
Overall specialty and fine chemicals volumes were up 4.8% Y/Y from the levels of November 2021. Year-to-date (YTD) headline specialty activity was up 7.5% compared to the same 11 months in 2021.
In our monthly report, we examined specialty pigments in detail. This is a 293,000 metric ton market in the United States and a 2.11 million metric ton market worldwide. We expect demand for US specialty pigments to have risen 6½% in 2022 but the business will slow appreciably in 2023 and 2024. Next year will prove challenging, but new pigment products as well as re-shoring in general, will support long-term growth of about 1¾% per year. Opportunities will vary among end-use markets. For example, in pigments used in printing inks, gains in packaging will partially offset losses due to rise of digital advertising and reduced print advertising, as well as the overall decline in magazine and newspaper subscriptions. In January, we will examine printing inks.
Basic Chemicals & Synthetic Materials
Looking further upstream, production of US basic chemicals and synthetic materials fell 2.2% to 34.0 million metric tons in November. This marked the fifth consecutive monthly decline , leaving output off 5.4% on a year-over-year (Y/Y) basis and off 0.8% on a year-to-date (YTD) basis.
Weakness was generally across the board in bulk petrochemicals & other organics, plastic resins , synthetic rubber, and manufactured fibers. Inorganic chemicals output gained during the month. Capacity utilization fell during the month.
Oil demand in China, India and the Middle East has been resilient, but there are concerns over an uncertain global economic outlook. China has reversed its zero-COVID policy and although short-term growth may suffer as COVID cases spread, it may have the effect of boosting oil demand later in 2023. On the supply side, OPEC+ production volumes dropped. EU sanctions on Russian oil went into effect and the G-7 nations imposed a price cap, raising the prospect of a supply gap. US production remains about 12 million barrels per day but gains in the rig count appear to be stalling. Our base forecast calls for oil (Brent) to fluctuate around $88 per barrel next year and in 2024. There are, however, scenarios for both a low case ($70) and high case ($125) for oil prices.
In the United States, mild weather aided natural gas inventory builds, but with last week’s severe winter storm across much of the nation has started the cold weather. With natural gas in storage lagging typical levels, this could put upward pressure on prices. although weakening domestic demand along with rising output is an offset.
Clients of course, have the details and the data. This is just a summary.
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Dr. Kevin Swift
Swift Economics LLC