Chemical manufacturers see an economy in turmoil, that could go either up or down as we head to year’s end, according to the American Chemistry Council’s Mid-Year Situation & Outlook report.
Moving into the end of the second quarter, the United States economy looked either resilient or weak, depending on where you’re standing, ACC pointed out, noting that the services sector of the economy is continuing to expand, slowly, while manufacturing still struggles.
“Going into the second half of the year, there is tremendous uncertainty, and the risk of recession remains high,” the council predicted. “We expect U.S. GDP to slow to a 1.3% gain in 2023 and slow further to 0.7% in 2024.”
As other economic analysts observed, the strong pandemic-driven rebound in goods spending has subsided as consumers have turned their attention to spending on travel, eating out and other services. All of this contributes to the inflationary spiral.
“Fueled by excess savings that accumulated during the pandemic, consumers have been able to continue spending and bear higher prices, driving inflation,” the council suggests. “Consumer spending has slowed, however, as the cushion of excess savings is exhausted. “
While wage gains are catching up to the rate of inflation, real wages continue to decline, limiting households’ purchasing power. As a result, the council anticipates growth in real consumer spending to slow to 1.8% in 2023 and ease to a 0.6% gain in 2024.
ACC also observed that while the pace inflation has improved from the peak reached in mid-2022, it remains stubbornly high despite aggressive action by the Federal Reserve to raise interest rates. It expects that inflation will average 4.2% in 2023 (following 8.0% in 2022) before it slows to 2.6% in 2024.
Other factors working to curb economic activity are the twin impacts of recent banking turmoil and tightening lending standards.
Corporate spending has declined as well. Growth in business investment slowed due to higher borrowing costs and substantial economic uncertainty. ACC believes that investment will slow to 2.0% in 2023 and ease slightly by 0.1% in 2024.
At the same time, the labor market has remained surprisingly resilient, although job growth and other measures of labor demand have slowed since the beginning of the year.
“Going into the second half of the year, there is tremendous uncertainty, and the risk of recession remains high,” the council said. “We expect U.S. GDP to slow to a 1.3% gain in 2023 and slow further to 0.7% in 2024.”
Not surprisingly, the chemical industry has been affected and reshaped by these and other economic events that have impacted end users from one end of the supply chain the other.
More than 85% of basic and specialty chemicals are consumed by the industrial sector and the outlook for industrial production remains weak, ACC says.
“We expect overall industrial production to fall 0.6% this year with only four of the 18 key end-use markets we track to expand in 2023. In 2024, production continues to ease by 0.4% before rebounding in 2025.”
ACC cited the automotive sector as an example of where it can all go wrong for chemical producers. With more than $4,000 of chemistry products in every vehicle, motor vehicles are an important end-use market for chemistry.’
Following three years of well below average sales initially due to the pandemic and then semiconductor shortages, assemblies are up, and dealer inventories have been replenished.
“Pent up demand for vehicles will be tempered, however by higher borrowing costs and uncertainty. As a result, we expect vehicle sales to rise to 15.0 million this year and rise to 15.4 million in 2024.“
Facing a Housing Crunch
Housing is another important consumer of chemistry products. Following a surge of activity driven by remote work during the pandemic, the housing market was among the first casualties of higher interest rates, the report notes.
Housing starts fell in 2022 for the first time since the housing crisis in 2009. With many existing home mortgages financed with low rates over the past decade, owners of existing homes face disincentives to move to new properties at higher mortgage rates, the council points out.
“As a result, inventories of existing homes are historically lean which may provide some support for new homebuilding,” the ACC explains. “We expect housing starts to fall to 1.32 million in 2023 and easing to 1.31 in 2024.”
Weakness in U.S. chemicals emerged in Q3 ‘22 and accelerated into the end of last year, offsetting strong growth earlier in that year.
Inventory destocking and production outages due to weather-related disruptions and refinery maintenance negatively impacted output in Q1.
Going into the second half of this year, inventory destocking has largely been resolved, but signs of customer restocking have yet to materialize. Firms throughout the supply chain are cautiously managing their inventories given the uncertain economic environment.
This is consistent with the findings of ACC’s new Economic Sentiment Index that found that chemical firms initiated overall business activity and major customer demand deteriorated in Q1 but are expected to improve over the next six months.
Because of the chemical industry’s early position in the supply chain, ACC said it believes that there will be a turnaround in chemicals before improvement in the broader economy.
“We expect chemical output volumes to fall 1.6% in 2023 with lower output in most segments. In 2024, we expect a modest recovery in all segments with overall chemistry output growing by 1.2%.”
ACC forecast that output of basic chemicals in the U.S. is expected to fall 3.1% in 2023 with the largest decline in petrochemicals and organic intermediates.
ACC also reported that the production of synthetic materials is expected to fall. Specialty chemical output will be essentially flat in 2023 as a gain in coatings is offset by declines in other specialty chemical categories.
Overall output of agricultural chemicals will decline slightly with falling output of crop protection chemicals only partially offset by a gain in fertilizer production, led by higher exports of nitrogenous fertilizers. Production of consumer products is expected to grow by 1.8%.
“The longer-term outlook for U.S. chemistry is positive with the natural gas liquids feedstock advantage continuing to favor U.S. production for the foreseeable future.” ACC says.
In addition, capacity expansions in customer industries motivated by recent legislation (IRA, IIJA, CHIPS) and re- and near-shoring of manufacturing to North America will support U.S. chemistry industry growth going forward.