Industry's Outlook Worsens

THE AMERICAN Chemistry Council projects that U.S. chemical output, excluding pharmaceuticals, will drop 8.7% this year from 2008 levels. The forecast represents a dramatic lowering of the trade association's projections from December 2008, when it estimated only a 3.1% decline.

In a double whammy of bad news, this year's slowdown in output will come on top of a downward-revised figure for output in 2008. T. Kevin Swift, chief economist at ACC, reports that 2008 production shrank 6.3%, about double his December estimate.

Even pharmaceuticals will venture into negative territory, according to Swift, although it is still the strongest chemical segment. He projects a small 0.7% output decline this year, compared with a 0.7% increase in 2008. Basic chemicals output will be the hardest hit, with a projected decline of 12.5% in 2009.

Swift says the updated figures reflect the same trends that he identified late last year but that the magnitude of the slowdown is greater than economists anticipated. "With a worsening economic environment, final demand has dropped, and customers continue to reduce their inventories," he says.

The U.S. Commerce Department's Bureau of Economic Analysis is also reducing its estimate of economic activity. BEA now says the fourth-quarter gross domestic product (GDP) plummeted an eye-popping 6.2%, compared with its initial estimate of 3.8%.

Ed Friedman, senior economist at Moody's Economy.com, says the economy has been especially hard to predict. "As the yearlong financial crisis accelerated in the fall, banks froze up completely, and that also froze up a lot of business," he says. Another confounding factor, according to Friedman, is the large decline in exports, one of the last parts of the economy to be reflected in government data.

Projections for the first quarter of 2009 do not show an improvement, Friedman reports. "GDP will move largely downward. The main factor is the large employment losses of 500,000 to 600,000 jobs per month," he says.

ACC's Swift does anticipate a light at the end of the tunnel later in the year due in part to spending from the federal stimulus package. "The massive stimulus being injected into the U.S. and other world economies will foster demand, and a virtuous cycle of recovery will engage," he says.

DuPont is already ramped up to take advantage of a boost in infrastructure spending. The company anticipates that many of its products, including Kevlar and specialty resins, will be used in "shovel ready" bridge and highway projects. "We are recognized as the leader in those segments," spokesman Anthony Farina says. DuPont will also benefit from spending on renewable energy because "you can't have a solar panel without a DuPont material," he adds.

Quantifying the anticipated stimulus impact is difficult, but ACC points out that every $1,000 spent on nonresidential construction yields an estimated $160 to $230 in chemical sales. Spending on green energy projects, such as wind turbines and solar cells, could boost chemical demand by an even higher amount, according to ACC.