As the economic recovery enters its third year, the pace of improvement has slowed in the United States. U.S. gross domestic product (GDP) surpassed its pre-recession peak in the fourth quarter of 2010, but growth slowed in the first quarter with higher imports and weak consumer spending. Business investment and exports have led the recovery thus far; however, recent indicators suggest that the robust manufacturing recovery has lost momentum.

Of the nearly 8.8 million jobs lost during the recession, less than a quarter have been recovered. As high unemployment persists, consumer spending remains weak. Consumers continue to be burdened by high debt levels and the impact of lower home prices on household wealth. Sharply higher oil prices have eroded household purchasing power. As a result, there is increasing concern about the potential for another global recession as higher energy prices choke off the expansion.

Addressing this concern, the following article considers an alternative scenario based on a relapse into recession, the possibility of which is believed to be about 25 percent. The base forecast presented throughout this report represents the consensus. And the consensus forecast for U.S. GDP is for continued growth, expanding by 2.5 percent in 2011 and 2.9 percent in 2012. A rebound of activity from the current “soft patch” is expected in the second half of 2011. The recovery, however, is fragile; multiple risks remain, and the wrong trade, tax, or other policy initiatives could derail activity.

Global Perspective On Chemistry
The global recovery has been most pronounced in emerging markets, which have contributed to the strong growth in U.S. exports. Global trade is expected to continue growing with volumes rising by 7.5 percent in 2011 and 6.8 percent in 2012. Sharply higher commodity prices and temporary supply chain disruptions from the disaster in Japan have slowed growth. The European debt crisis continues to present one of the greatest risks to the world economy. Global GDP (market exchange rate) is expected to grow by 3.2 percent in 2011 and 3.5 percent in 2012.

Most major end-use markets for chemistry have recovered, especially those tied to export markets and capital equipment. The manufacturing sector, which is the largest consumer of chemistry, rebounded strongly during the fourth quarter, but growth has slowed as demand has weakened. Manufacturing output remains below its pre-recession peak. Light vehicle production has experienced temporary disruptions from the disaster in Japan. Vehicle sales are expected to rise to 12.9 million units in 2011 and 14.2 million in 2012. New homebuilding remains depressed as foreclosures continue to flood inventories. Minor gains in housing starts of 597,000 in 2011 and 811,000 in 2012 are expected as the recovery in this sector will be quite slow. A full recovery will not manifest until later this decade.

Despite solid gains in the first quarter, the softening of the manufacturing recovery will likely dampen chemical demand. Chemical inventories, however, are more balanced and a large correction is not expected. Production of chemicals, excluding pharmaceuticals, has eased as demand from key end-use markets also slowed, but capacity utilization continues to tighten. Chemical exports continue to grow, driven by overseas growth, a lower dollar, and a favorable oil-to-gas price ratio. Chemical imports grew strongly during the first quarter and are expected to grow at a more modest pace as consumer spending and manufacturing ease. Chemical output is expected to strengthen in the second half. As a result, American chemistry output is anticipated to rise by 4.1 percent in 2011, before easing to growth of 3.5 percent in 2012 and 2.8 percent in 2013. With strong headwinds facing the U.S. economy, domestic demand is expected to be soft, and thus demand growth for chemicals is also expected to ease in the coming years. Export demand may provide support for the industry.

Chemistry Market Projections
The consensus for pharmaceuticals is a 3.0 percent rise in output in 2011 before recovering to 4.0 percent growth in 2012 and 2013. For chemistry excluding pharmaceuticals, the American Chemistry Council expects to see 4.8 percent growth in 2011 before slowing to 3.1 percent in 2012 and 2.0 percent in 2013. Production of basic chemicals is expected to grow by 4.8 percent in 2011 and 3.2 percent in 2012 following the strong rebound in 2010. Strong growth is expected in petrochemicals and organic derivatives, plastic resins, and synthetic rubber. Production of specialty chemicals is expected to grow 3.5 percent in 2011 driven by demand from end-use markets before improving further to a 4.0 percent pace in 2012. Strong gains are expected in agricultural chemicals and consumer products as well. In the long-term, U.S. chemistry growth will average 2.9 percent per year, a pace exceeding that of the overall U.S. economy.

Strong gains in capital spending by American chemistry are expected during the next several years, the result of new investment in petrochemicals and derivatives arising from shale gas developments. The need to add capacity and improve operating efficiencies will play a role as well. Capital spending in the business of chemistry will reach $30.0 billion in 2011 and will steadily rise to $40.4 billion by 2016.

Global chemistry continues to advance, with expectations for output to grow by 4.8 percent in 2011, 5.3 percent in 2012, and 4.7 percent in 2013. Output of chemicals in emerging markets will exceed that of the developed countries. Strong gains are expected in China (now the largest chemical industry), India, and other emerging markets in the Asia-Pacific region. Africa and the Middle East will also experience strong growth as will Latin America. From a product standpoint, we’ll see the strongest growth in the cyclically sensitive sectors, such as petrochemicals and organic derivatives, plastic resins, synthetic rubber, and man-made fibers, as well as specialty chemicals and consumer chemistry. Rising incomes and demographic factors (i.e., aging populations) will shift growth toward pharmaceuticals. In the long-term, global chemistry growth will average 4.1 percent per year, a pace exceeding that of the overall global economy. Strong gains in capital spending by the global industry are expected during the next several years. This will result in the need to add capacity for new and existing products. Capital spending in global chemistry will reach $548 billion in 2011 and will steadily rise to over $1 trillion by 2016.

Considering the ‘Soft Patch’
Many forecasters are concerned that the soft patch in the economy could devolve into an outright downturn. Persistent higher energy prices, the collapse of housing, the supply chain shock emanating from Japan, European debt crisis, U.S. debt issues, uncertainty, and other factors are working against the recovery. These factors could engender a vicious cycle of financial distress, asset depreciation, and falling incomes, sales, production, and employment. These challenges have the potential to push the global economy back into recession. The odds of this alternative scenario have risen to about 25 percent. Should another downturn occur, U.S. chemicals output, excluding pharmaceuticals, would only grow by 3.5 percent in 2011, by 0.8 percent in 2012, and by 2.8 percent in 2013. The alternative scenario includes a few quarters of declining or, at best, soft activity.

These quarterly dynamics are not as apparent using annual averages. Indeed, the economy is in a soft patch, but most forecasters expect the recovery to progress (though the pace will be anemic and uneven at times). Consensus expectations are for a rebound in the second half of 2011. Let’s hope that the consensus scenario is realized.

This report was created by the American Chemistry Council’s Economics & Statistics Department, which provides a full range of statistical and economic advice and services for ACC and its members and other partners. The group works to improve overall ACC advocacy impact by providing statistics on American Chemistry, as well as preparing information about the economic value and contributions of American Chemistry to our economy and society.

Methodology: This report presents an assessment of current conditions and expectations for the global business of chemistry, with particular emphasis on the United States. The analysis uses economic data and publicly available information through mid-June 2011.

In looking ahead, a model of global output for the business of chemistry is employed. Also taken into account are the forecasts made by economists at the various national chemical associations in Europe and from economic forecasting consultants and other institutions, including IHS Global Insight and Oxford Economics. The macroeconomic forecasts of the Economist Intelligence Unit (EIU) were also important to our thinking as was the U.S. Industrial Outlook of the Manufacturers Alliance/MAPI. These were supplemented by forecasts provided by the Asian Development Bank, IMF, OECD, the WTO, and various banks. The forecasts that are presented in this analysis are our own.
Historical data (back to 1994) and annual projections (to 2017 and beyond) for the accompanying table on the next page is available in a spreadsheet.

Note: Every effort has been made in the preparation of this publication to provide the best available information. However, neither the American Chemistry Council, nor any of its employees, agents, or other assigns makes any warranty, expressed or implied, or assumes any liability or responsibility for any use, or the results of such use, of any information or data disclosed in this material.

Thomas Kevin Swift, Ph.D., is chief economist and managing director for the American Chemistry Council. Dr. Swift can be reached at 202 249-6180 or kevin_swift@americanchemistry.com.

Martha Gilchrist Moore is senior director of Policy Analysis and Economics for the American Chemistry Council. Ms. Moore can be reached at martha_moore@americanchemistry.com.

Smita Bhatia, Ph.D., is director of Chemical and Industry Dynamics for the American Chemistry Council. Dr. Bhatia can be reached at 202 249-6184 or smita_bhatia@americanchemistry.com.

Emily Sanchez is director of Surveys & Statistics for the American Chemistry Council. Ms. Sanchez can be reached at 202 249-6183 or emily_sanchez@americanchemistry.com.