March 24, 2023

Hello, everyone. I’m Alan Beaulieu with ITR Economics and welcome to this edition of TrendsTalk. Today, we’re going to talk about February. And since it’s about the middle of March, it makes sense we talk about the month that’s just passed, but I want to do it in two ways. I want to talk about what happened in the month, but I want to try to put things in context as well. What we’re not going to talk about is some March things, like the Silicone Valley Bank. Brian touched on that in his last Fed Watch, and he and Kyle Stevens have had more to say about that in our Executive Series Webinar. So I don’t want to go into their territory. I mean, it’s fascinating, a lot going on, they’ll cover it all.

You want a quick summary, the Fed Watch is a good way to do it, or I can give you a couple sentences and that there is some structural issues in the banks, but not in the system. The SRB, for instance, was under Fed Watch for a year, and then they imploded as bond values went down and they had poor structure, poor performance, poor plan, and it came back to haunt them and their investors. And same with the Credit Suisse, et cetera. So, in any event, Brian deal with that. That’s not our issue today.

Today, I want to make sure that we’re focused on basic economics as opposed to the, don’t want to say hype, but the over stimuli that comes from focusing on the banks. For instance, in February, retail sales went down from January as they’re apt to, and the media reported that it was a week February number and probably made the Fed happy. And maybe he did make the Federal Reserve Board happy, but let’s put the February weakness in context.

The February number did come down and it was a little on the weak side in terms of it’s steeper than most would like to see, but if all the January that was truly impressive in the mildness of the decline. So when we smooth it out into the three-month moving total and see a seasonal trend, the seasonal trend for both real and nominal was equal to last year, which means it was pretty good, not fantastic, but pretty good, and it was only slightly milder than median. So what’s it mean? Means the consumer’s still out there. The consumer’s not falling apart. The consumer is not out there spending tons of money, going to overheat the economy, but neither are we on the precipice of destruction, as some may have us to believe. We are on the edge of that slowing down and coming to later this year that recession that we’ve been talking about at ITR because of the interest rate rise.

When we look at disinflation in February, inflation rate came down to 6%, which is good. Remember the peak was 9.1% back in June of ’22. It was not as low as the Federal Reserve Board wanted or as far as a lot of people wanted, but it’s still disinflation, and in and of itself that’s good news. But at that level, you can expect that the Fed will continue to raise interest rates. We are expecting that. I hope that you are too. And as that happens, don’t be surprised, don’t think that it means great shockwaves are going to go through the economy. I think we’re just going to continue to see the Fed raise rates for a while yet. That’s not going to change our forecast. You know what it is, mild recession for late ’23 and for most of ’24 in industrial production, which brings us to the last set of numbers, industrial production for February.

Industrial production in February was a milder than median rise from January. Okay. Milder than median is not bad. It was a milder rise than we saw last year, but last year was quite the rise. It was an impressive rise, so milder than median is still a good number. But let’s put it in context. The rise we saw from January to February industrial production was steeper than the previous 10 years. And if we take out last year’s really steep rise, we go the 10 years before that, it was still steeper than that. Go back before COVID, it was steeper than the 10-year average of that. So let’s put February in context, it’s a pretty good month for production.

The rates-of-change are still in phase C. They’re still signaling we’re on track for that decelerating rise, and then that recessions. As matter of fact, the 12-month moving average is on the flat side right now and three-month moving average is on the flatter side right now. You can expect that sluggishness to continue before we see that mild decline again late this year. But as the month goes, it’s telling us you don’t need to worry about anything in the moment. And as we look at the larger trends, we’re on track with the outlook.

Now, what is going right? Automotive. Automotive had a great month. February came in 14.1% above the year ago level. The 3/12 is in Phase C, which means we’re seeing some decelerating rate of rise building in the rates-of-change. But the February increase of 11.55% from January was a steep… it was solid. It was slightly steeper than median. So the automobile industry, while it’s slowing, is not showing signs of falling apart, and we should see the negative pressures increase in automotive in the second half of this year with perhaps some mild decline in the 12 improving average. But for right now, the February number says, if that’s where you are, you should plan on a few more months of upside activity with some slowing growth and then some mild decline later in the year.

If you’re in aerospace, nice 112 of 7.8% above year ago levels, it was a nice increase. It was steeper than the previous 10 years. Aerospace, you’re doing well and you’re going to continue to enjoy some of that rise until later in the year again.

So on a whole, February, good month. In context, right in line with forecast. The outlook there is, as we have said, slowing growth for the macroeconomic environment than a recession. But the key comes, what do you do with it with your company? How are you going to relate that to your rate of growth and your timing, and if you’re going to go to recession, and if you are, what’s it going to look like? That’s where you need your rates-of-change and you need to work on your rates-of-change.

I was just talking to a friend of ITR earlier today saying he’s surprised by how many people have access to that information but don’t take advantage of it. Let me encourage you to please take advantage of it. Rates-of-change information how to is right on our website, on the methodology. Go there. In future rates-of-change, track it against lead indicators. If you’re on the industrial side of the economy, wholesale trade, distribution, track it against US industrial production. You’ll get a great handle on where you’re going and what this all means for you. And as you do that, you’ll turn down the noise of all those other things that are going on and coming at you. Thank you for joining me for this issue of TrendsTalk. We’ll see you next time around.