December 16, 2022

Hello, everyone. Connor Lokar here, checking in for another ITR Economics TrendsTalk. And I come today bearing news, for some of you anyway, and the big news is that ITR changed our US Industrial Production Forecast and lowered it to now encompass recession for 2024. And the question is, now what? Now for those of you that are ITR Trends Report subscribers, you got this news days ago, if not over a week ago, depending on when you eventually listened to this.

But for some of you listeners, this actually might be the first time you’re hearing of our big forecast change. And it is big. ITR, we pride ourselves on accurate, long-term forecasts, and we’re darn good at it, if I do say so myself. So when we change a macro forecast like this, and especially when it’s the largest economy on earth, it is a big deal. For reference, our prior US Industrial Production Forecast was in place since July 2021. So we got almost 18 months a run out of that one, and it was running at an accuracy rating north of 98% by the way, before we made this most recent change in terms of actual performance relative to forecast, which is pretty good. But all forecasts, even the good ones have to be put out to pasture eventually.

So to recap the forecast change quickly is, we have taken a soft landing for this cycle off the table. And we now see a recessionary outcome as probable for the US economy in 2024 with the onset of decline on a 12-month moving average basis, actually starting late in 2023. The primary drivers behind this change is the now sustained yield curve inversion between the 90-day and 10-year yield trends, as well as the absence at this point of any statistically significant positivity in our leading indicator complex at this point. So the change is not so much what today’s about to the full details of the forecast change, specific growth rate, or contraction targets, and just deeper context behind it. That call can be found in our Trends Report, which I know a lot of you already subscribe to, but certainly recommend that you subscribe if you don’t already.

But today’s more about, what do we do now? So the good news, if I can call it that, a little bit of a spin I would say, is that the bigger change to the forecast is occurring to 2024 than 2023. So for those of us living in a calendar year goal and budget world, which is most of us, we have time to react and plan for 2024. Your 2023 expectations really shouldn’t change a whole lot based on this forecast revision, perhaps slightly lowered a bit with some bias as far as weakness late in the year. But as far as what to do now, here’s your checklist. This is what you need to follow to assess individual impact to your business.

So number one, at the highest level is, do you have a history of responding to yield curve inversions? Our analysis of our consulting clients that we do revenue forecasting for here, and consulting works with at ITR, showed that 41.7% of the company forecast that we’re going to be delivering this month do not have a meaningful relationship to yield curve inversions. Put another way, that also means that almost two-thirds of our client base this month does have a relationship. So you’re going to want to answer and find out which camp do you fall in there.

Number two, do you correlate to the US economy and US industrial production? For most of you, the answer’s going to be yes, but not everyone. Inversely correlated businesses, for example, could find themselves with a better outlook for 2024 as a result of this change, if you run counter cyclically to the US economy. So find out which camp you fall in here.

Number three, and this is a big one I think. Do you lead or lag the US economy? Your business has a lagging relationship to the US economy of several months or quarters, it’s improbable that you really have to worry much at all about 2023, and most of your anxiety’s going to fall in 2024, and might even leak into 2025 depending on how much the US economy leads your business. However, if your business leads the US economy, meaning your business feels changes in activity, order rates before the US economy actually starts to slow down, then weakness in your bookings trend could actually show up much earlier in 2023. And perhaps as early as the first half of next year, the middle of next year, which could lead you to a much slower 2023 exit than your plan and budget may be calling for, assuming you’re in the stages of wrapping that up.

And then finally, and this one’s a little bit harder probably, but what potential COVID echoes might amplify or offset this weakness? And I think my last recording in November, we talked about these COVID echoes, and I detailed housing as a biggie. That it’s not only a leading sector, but it’s also a major COVID echo sector, which was stimulated way over pre COVID trend and is now being punished in this high-interest rate environment and will be a higher risk sector for 2023. Other side of that coin, automotive markets, for example, that were unduly negative in this past year, year and a half, because they couldn’t get enough chips. Well, they’re starting to get those chips, so they may actually see maybe some upside performance for next year. So think about those COVID specific echoes that could throw in some wrinkles into this plan.

So I think those four points, assess exposure to yield curve, express your correlation or lack thereof to the US economy, number three, assess your lead or lag time to the US economy, and then still thinking about some of those lingering COVID effects. I think that, that makes for a reasonable damage assessment plan to follow and try to understand how this forecast change impacts you. I think a data cast subscription or working directly with an ITR trusted advisor like myself can help you answer all these in fairly short order. But if you’re adept with data analysis, you can certainly make a reasonable go of it yourself. That is the checklist I would personally follow if I were in your shoes. So answering all those questions are going to help know whether you need to manage your business out of the slowing growth, or recessionary playbook, or potentially both at various points in 2023 and 2024. So, the forecast has changed. What do we do next? That’s all for me today. Thanks for stopping by. And I will see you in the next one.