September 8, 2023

Hi everyone. My name’s Taylor St. Germain, and welcome to this edition of Trends Talk. Today I wanted to take a step back and look at the macro-economy. We’ve been talking about a lot of specific sectors of the economy over the last few weeks, and I wanted to take a step back and briefly discuss our major headline series, US Industrial Production.

It’s our Trends Report series. We, of course, forecast US GDP, but we find that a lot of the clients that we work with correlate much better with US industrial production. And again, just a reminder, US industrial production is really highlighting the manufacturing, utilities, and oil and gas and mining side of the economy. So for those of you with a manufacturing presence, it’s likely the macroeconomic data series that you’ll correlate best with.

In the recent edition of the trends report, the August Trends report, our Vice President of Economics, Jackie Green, highlighted a mild downward revision that we made to US industrial production.

We didn’t update the timing for 2024 in terms of timing the low point, but the adjustment was really indicative of an amplitude adjustment. And so what do I mean by that? We were previously forecasting about minus 2.3% for 2024 in terms of the annual growth rate. So we expected industrial production to be down in 2024 minus 2.3% compared to 2023.

We have downward revised that to minus 3.6%. It’s a very mild revision. It’s more indicative of our forecasting noise as our VP highlighted in the executive summary of the trends report.

But I wanted to talk a little bit about some of the leading indicators and some of the risks. You’ll notice if you’re a Trends report subscriber, we have our ITR leading indicator, and the US ISM purchasing managers index 112 rate of change. We look at that ITR leading indicator and the PMI compared to industrial production.

And you’ll notice that they’re signaling this recession is coming our way, they’re highlighting the low point as we get into next year. But lately, we’ve even seen a little bit of rise out of the indicator.

Now, the indicators are really moving sideways. The rise isn’t meaningful. So for those of you that are looking at those indicators in the trends report, we’re watching them closely because we’re looking at these indicators in terms of informing that rise as we get out into 2024.

It’s just, I don’t want everyone to read too much into that rise just yet because it’s not meaningful from our perspective. But it is good news to see some of these leading indicators pointing towards the second half of 2024, showing us some rise.

Now, again, taking a step back, even though we have some good news starting to form in these leading indicators on the horizon, they’re leading indicators. And their lead time does suggest that we see some downside pressure through the remainder of this year, and into 2024 for US industrial production.

So we still have this mild recession outlook for the macro-economy. Again, it’s not the magnitude of the pandemic. It’s not as bad as the pandemic downturn. Certainly not as bad as 2008, 2009, but it is, by definition, a recession for us.

In terms of something that we’re watching still related to the macro-economy is the yield curve inversion. We look at the 10-year yield versus the three-month yield, and it is still inverted as I’m talking to you all here today.

Now, if we do not see that yield curve normalized by the end of 2023, that would be a risk to our industrial production outlook, and our outlook for GDP for that matter. Now, the Federal Reserve has signaled that they’ll be pumping the brakes on interest rate increases.

Now, we could still get another quarter point as we look out over the coming months. That’s not going to significantly change our forecast in any way. What we’re really watching though, is for that yield curve, as I had mentioned, to normalize by the end of this year.

So that’s how we’re thinking about interest rates. Again, might get another quarter point increase, might not. But really, what we’re paying attention to as it relates to interest rates, is the normalization of that yield curve.

Our CEO, Brian Beaulieu, covers this every Friday during his Fed Watch video, so please check that out. I just wanted to take a second here, talk to you a little bit about these leading indicators, how we’re thinking about interest rates and highlighting that we still are projecting a mild recession in the macro-economy. It’s still mild though, and so I wanted to just make sure that I checked in with you all and shared that update.

I hope you found this information helpful. My name’s Taylor St. Germain. Thanks for joining me on this episode of Trends Talk with ITR Economics, and I’ll see you on the next one.