The State of the Economy Looking Forward
On the leading edge of the economy, we are seeing green shoots of recovery in single-family residential construction. The tight supply of existing homes supports strong demand, but affordability remains a constraint due largely to elevated interest rates. While more accommodating rates would be most impactful, inflation-adjusted income is rising and will help prospective buyers save.
Core metrics of the macroeconomy such as Industrial Production, capex, and consumer spending are in late Phase C, Slowing Growth, and will contend with Phase D, Recession, in 2024. While it can be daunting to face a year of contraction, recovery in the housing market serves as an encouraging reminder that this decline is temporary. Rise will resume for most industries in 2025. Opportunity can be found in countercyclical and nondiscretionary markets; those which have received federal funding, such as semiconductors and renewables; and younger industries, such as e-commerce.
The lagging nonresidential construction sector is near its peak growth rate for this cycle and will soon slow. Decline is slightly further out on the horizon for nonresidential construction, occurring in late 2024 and into 2025.
Leading Indicators Are Mixed, the Fed Remains Hawkish
The ITR Leading Indicator™, US ISM PMI (Purchasing Managers Index) monthly rate-of-change, and the US OECD Leading Indicator rate-of-change have moved higher in recent quarters. In a typical business cycle, this burgeoning upward movement would suggest near-term recovery and rise for both the US industrial sector and the broader macroeconomy. However, when broadening the analysis to other key drivers, the consensus breaks down.
Many metrics – from corporate profits to lower supply chain pressures to industry utilization rates – are still pointing to rate-of-change decline for US Industrial Production for the coming quarters at least. Major indicators of the upcoming downturn remain the inverted US Treasury yield curve and prior softening in inflation-adjusted consumer savings.
While we do not forecast what the Federal Reserve will do, their messaging remains hawkish as they try to tamp down inflation to their 2% long-run target. While many headlines suggest the US economy may be able to avoid a recession after all, our analysis suggests that is not likely. While the leading indicators remain mixed, the most convincing evidence still points toward a mild recession with a late-2024 low. The impact of contractionary monetary policy takes time to unfold, and further pursuit of this policy risks pushing out the timing of the business cycle low into early 2025.
Form Your Action Plan Looking at Least Half a Business Cycle Ahead
For 2024, have a plan for a median outcome and have contingency plans for both the upside and downside. In addition, think back to previous economic booms – what do you wish you had done during the downturn to set your business up for success? Time those actions so you can capitalize on the general rise during 2025 and much of the second half of this decade. Look for ways to lean into your competitive advantages and take the time to address any competitive disadvantages you may have. Extra time may afford an opportunity for system upgrades or efficiency improvements. Lastly, we expect the labor market to remain relatively tight. Look to retain and cross-train key, high-performing employees to keep the business running, and look for ways to minimize your dependency on labor through efficiency gains.
