August 5, 2024

Taylor St. Germain:
Hi everyone, my name is Taylor St. Germain with ITR Economics and welcome to this edition of TrendsTalk. We at ITR are your apolitical and unbiased source of economic intelligence and today I wanted to take a step back and talk about the macroeconomy and where we are in the business cycle.

I feel like this is important given the data that came out from GDP last week. If you haven’t tuned in to our CEO’s FedWatch from last week, I would encourage you to do so. Just because we interpret the GDP data based on our analytics and based on what the historical trends are telling us. And it seems like it’s a little bit different on how the media is interpreting GDP. I’ll cover that again here briefly for you, but I certainly urge you to go check out Brian’s description in the FedWatch video of how we interpret GDP.

Now, while the GDP reading was good, being that GDP is still rising above the year ago level, it wasn’t as strong as what it was made out to be in the media. And that’s why we look more at these quarter to quarter changes, what’s normal, what’s strong, what’s weak. And while the GDP reading again came in above the year ago level, we are still seeing a lot of signs of weakness around the economy. And our expectation is still that GDP slows as we move into the second half of 24.

So just be very careful about what you’re reading in the media and we’ll always remind you of that. But I wanted to talk about where GDP is, where GDP is going and how that relates to the industrial economy. Because there’s just two very different realities of what’s going on out there in this big US economy. Now, again, if you look at the latest GDP reading, we’re coming in above the year ago level, GDP has continued to grow at a pretty steady pace. But when you look at some of the underlying weakness as you peel apart GDP, that’s where this different reality becomes important to understand. If you look at the service sector of GDP, services are still strong and they’re rising well above industrial activity. So if you’re in the service sector, if you’re really tied to some of that consumer spending, life is pretty good right now.

But again, we still would expect some of that to slow as we see the consumer under a little bit of pressure and consumers holding up well, but we are seeing minimum payments on credit cards rising. We are seeing the savings rate come down from where it was during that post pandemic timeframe. And these things will contribute to some softening in GDP as we move forward. So it’s very important to understand some of these underlying factors.

Service sector is doing well, but there’s still reasons that we would expect to see some slowing. Retail sales is another dataset that’s been slowing for quite some time. The housing market is expecting to turn over and slow down. Again, still grow, but grow at a much slower pace. So there are these signs of weakness in the economy, despite again, how Rosie the media likes to make this GDP reading sound. But where my concern still comes in is related to the industrial economy, is related to our manufacturing sector.

And if you look at the comparison between the US industrial production index and the service GDP sector, it’s very clear that industrial activity is much weaker. And another way to put this is if you look at our US industrial production index, both the quarter over quarter growth rate and the year over year growth rate are below zero. So we are seeing some contraction in the industrial economy, some contraction in manufacturing. And that is likely to continue to highlight the balance of 2024.

We do expect the industrial economy to actually come in below the year ago level when comparing 24 to 23. Now, it’s not a major economic recession by any means, but again, it’s still just a very different story than what you’re likely hearing out there in the media. So make sure you’re focusing on the data set that is most important to you, the leading indicators that are most important to you. Because if you’re a retailer, you might be just feeling a slowdown in your data. But if you’re a manufacturer, you might be down below the year ago level right now. And it’s hard to make those connections to a media story about GDP. Because again, the reality is there’s just a lot different, the trends are a lot different depending on which one of these sub sectors that you’re looking at.

But let’s talk about what to do as we move forward. So if you’re in correlate with the industrial economy, you’re a manufacturer, you’re a distributor, and you’re feeling your data down below the year ago level like industrial production, then it’s likely you’ll continue to feel some of that weakness through the end of the year. but as we look ahead to 25 and 26, that’s when we see the US industrial economy improving once again. And so despite some of this weakness that you’re feeling now, I want you to be constantly looking ahead because we have about another two quarters of this industrial weakness before the industrial economy is accelerating.

So now is the time to be thinking about how your business is going to take on this next cycle in 25 and in 26. What are you doing to prepare right now? Are you hiring? Are you finding efficiency gains to be able to take on this increasing demand? I don’t want you to get stuck in this doom and gloom second half of 24 where things are a bit weaker in loose sight of all of this growth that’s coming in 25 and 26. If you’re a retailer and you are more tied to that service sector, watch your inventory levels. Be cognizant of this slowing growth that is expected to characterize the second half of this year. So maybe you’re not falling below a year ago levels like you see in the industrial economy, but your data is likely going to continue to slow as we see that service sector slow down. Watch your inventory levels. Stay on top of those aging deliverables. Stay on top of those products that during some consumer, what I would say some squeezing of the consumer are going to do better in a slower year. And similar to the industrial economy, look at this accelerating growth that’s coming our way in 25 and 26. And be sure that you’re ready to take on that demand and your suppliers are ready to take on that demand. So we’re not turning away growth in the coming years.

So overall, my message is the industrial economy is showing some negative growth rates right now. It likely will through the end of the year. The consumer sector, the service sector is going to slow further. And despite maybe not contracting, you’re still going to feel some weakness. That’s the story for 24. Look at the data set that’s important to you. And regardless of which sector that you’re in, there’s gonna be a lot of tailwinds coming our way in 25 and 26. And now is the time to be thinking of how we’re going to take on those coming years.

We’ll talk more about these forecasts as they evolve. I know there’s a lot of questions with a lot of the uncertainty that’s coming our way later this year with an election, with a lot going on. It’s an exciting time to be an economist. Maybe not so exciting to be planning for the future years, but that’s what we’re here for to read through these tea leaves and make sure we’re keeping you updated on how to best capture this business cycle.

I hope you enjoyed this episode. My name is Taylor St. Germain with ITR Economics. Please remember to like and subscribe to The Trends Talk wherever you listen to your podcasts and we’ll see you on the next one.