Downward pressure is pervasive and intensifying as consumers struggle with the cumulative impact of elevated inflation and tighter financial conditions. Wholesalers and manufacturers are already contending with year-over-year contraction, while retail and business-to-business spending growth is slowing to a crawl. US Single-Unit Housing Starts, which typically lead the economy, are an exception to this widespread weakness; Starts are in the early stages of recovery. The nonresidential construction sector is also an outlier, but the current acceleration will soon give way to slowing growth.
Supply chains continue to adapt to the ripple effects of 2020. A few industries – such as automotive and aerospace – are still rebuilding inventories, while others have overbuilt inventories and are now correcting course. We are keeping a close eye on inventory-to-sales ratios and the state of the supply chain. We are encouraging our clients to try to improve communications along their supply chains in order to minimize any bullwhip effect.
Evidence for the Mild Decline in 2024
For many markets, mild decline will be the predominant trend in 2024. Consumers, who are a driving force of the US economy, are facing budget challenges. Credit card delinquencies are trending around the highest level in a decade, and savings balances (adjusted for inflation) are running below the long-term trend. The cumulative effect of prior high inflation and elevated borrowing costs will put further pressure on consumers’ budgets into 2024, impacting many retail markets and the broader economy.
On the business side, corporate profits are below the year-ago level, corporate bond yields are elevated, and bank lending standards are tightening. Amid these financial factors, coupled with softening economic data, businesses will likely be more conservative in their capital goods investments. However, it is important to note that Corporate Cash Holdings are well-above pre-2020 levels, and businesses are so far managing their debts relatively well. These factors suggest the economic decline will be relatively mild. How 2024 feels to your company will depend on its exposure to the more budget-constrained consumer, its sensitivity to interest rates, its inventory levels, and any market share changes.
Opportunities Lie Ahead – Plan for Rise in 2025
Try not to get caught up in the volatility and pessimistic bent of the media. Instead, follow data-driven economic analysis and apply the strategies that align with the pertinent phase of the business cycle. Check out the Management Objectives™ on the last page of this report for some ideas, and be sure to look ahead to the Phase A, Recovery, strategies so that you are ready to implement them for maximum benefit when the time comes.
The US is still a great place to do business, and we expect the economy to resume its ascent in 2025. A shift in monetary policy to something more accommodative will likely be a contributing factor. Additionally, we think a 2024 characterized by disinflation and reduced spending will help consumers regain stronger financial funding.
As the volatility of the early 2020s recedes further into the past, the economic ripples will slowly dissipate. Businesses will adapt to new conditions. Still, some challenges will remain. We expect inflation and borrowing costs will remain higher than in the 2010s, so have a plan to protect your margins and do not expect cheap money. Demographic trends will keep the labor market relatively tight, so look for ways to reduce your dependency on labor and increase your efficiency.
