All Eyes On The Economy | January 28, 2008 Issue - Vol. 86 Issue 4 | Chemical & Engineering News
Volume 86 Issue 4 | p. 12 | News of The Week
Issue Date: January 28, 2008

All Eyes On The Economy

A recession in the U.S. could hit chemical makers hard
Department: Business

RECESSION WORRIES came to a head last week, sending financial markets into a frenzy and leaving experts wondering how much impact a downturn would have on the chemical sector.

As recently as late last year, economists had been hoping that strong U.S. employment and retail sales would offset the housing slump, but new statistics show both the job market and consumer spending to be alarmingly weak. Chemical output also slipped somewhat in December. The Bush Administration and Congress are even negotiating a stimulus package to help avert or pull the U.S. out of a recession.

Last Monday, with U.S. financial markets closed, stock exchanges in London, Frankfurt, Tokyo, Hong Kong, and elsewhere declined sharply due to fears that the global economy would be brought down by a U.S. recession.

To stem a precipitous decline, before markets opened in the U.S. on Tuesday, the Federal Reserve Board announced an unusual 0.75% cut in a key interest rate. The Fed said the move, the first unscheduled rate cut since the aftermath of the Sept. 11, 2001, terrorist attacks, was meant to address "a weakening of the economic outlook and increasing downside risk to growth."

It took a while for the rate cut to spur a rally. The Dow Jones industrial average fell nearly 5% in early Tuesday trading but later recovered to a loss of just 1.1% for the day. The following day, the Dow Jones climbed 2.5%, hitting 12,270 points.

But as of late last week, the Dow Jones was still down about 13% from its high last October. Chemical stocks have seen a similar decline. The Standard & Poor's chemicals index was down last week more than 8% from its high of 328 in December.

T. Kevin Swift, chief economist at the American Chemistry Council, says it is too soon to tell whether the U.S. economy is in a recession, though he admits that it is a growing possibility.

"I am probably more pessimistic than I was in early December," he says. "What we are in for, at least in the first half of the year, is very subpar growth. The downdrafts are just so large, and the few updrafts that we do have—exports being one—can't offset the effects of the weak housing market and soft consumer spending."

DuPont, the largest U.S. chemical company to report fourth-quarter 2007 earnings so far, seems to be bucking the downward economic trend. DuPont posted a fourth-quarter sales increase of 11% to $7.1 billion versus the same period the year before and an increase in earnings, excluding unusual items, of 24% to $522 million. Full-year sales increased 7% to $29.7 billion, while earnings increased 13% to $3.0 billion.

In a letter to shareholders, DuPont CEO Charles O. Holliday Jr. said strong sales overseas—more than 60% of the company's total-helped offset weakness in the U.S. For instance, sales of titanium dioxide pigment were down in North America but up slightly overall on the strength of European and Asian markets. "In 2008, our global market presence and change in business mix since the 2001 U.S. recession will make us much more resilient to the impacts of a recession in any one country," Holliday said.

Frank Mitsch, equity analyst at BB&T Capital Markets, says DuPont's results are encouraging. "Watchers and investors of DuPont's equity or the broader market at large may be forgiven if they feel we are on the eve of economic destruction," he wrote in a note to clients. "However, we are pleased to see how well DuPont performed in the fourth quarter of 2007, which many felt would show signs of economic weakness. Didn't happen."

But other chemical companies are feeling the effects of the economic woes. Solutia said last week it is delaying its emergence from bankruptcy, originally scheduled for the end of this month, because its financial commitments fell through due to the ongoing credit crunch.

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