March 18, 2024

Hi, everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this edition of TrendsTalk. We at ITR are your unbiased and apolitical source of economic intelligence, and today I wanted to talk leading indicators.

I wanted to talk about a few of our favorite leading indicators and what they mean for this year, even into later this year, as we look at some of these leading indicators that have some longer lead times when comparing to our major macroeconomic benchmarks. For those of you that are trends report subscribers, you’ll recognize several of these leading indicators from our trends report. Again, as I mentioned, maybe we’re a little biased because we developed some of these on our own, but these are some of our favorite leading indicators, especially in terms of their predictability in terms of future direction of this big US economy.

So I wanted to talk about the ITR retail sales leading indicator, the total capacity industry utilization rate, and finally ISM’s Purchasing Managers’ Index. I wanted to talk about what each one of these indicators means for the economy. We’ve talked a lot of different economic trends, different economic data series over the past week. Past weeks, for that matter, I should say.

Now, when we look ahead to 2024, especially as we look at our benchmarks like US industrial production, we see some contraction coming our way. Again, we’ve talked about this in great length on prior episodes. So I wanted to provide you all with an update on what these leading indicators are still suggesting as it pertains to some of these major macroeconomic outlooks like industrial production.

The total capacity industry utilization rate. So again, this is an economic data series that’s looking at output over capacity. It’s one of those ratios. And when we look at the 112 rate of change for this indicator, we see about a seven-month lead time to US industrial production. So when we look at the recent movement, which is the general descent in this capacity utilization indicator, it continues to confirm our expectation around some mild contraction in the industrial economy in 2024.

So whether it’s the ITR leading indicator, whether it’s the capacity industry utilization rate, these two indicators are both in support of our forecast, which is contraction in 2024, especially into later this year, but mild contraction. So these are really supporting evidence for our forecast for the US economy. I’m sure you wish there was better news, like an upgrade to our industrial production outlook, but these indicators continue to support the current forecast that we have in place.

There is an upside risk in the leading indicators as it relates to the US industrial economy, and that would be ISM’s Purchasing Managers’ Index. Now, it’s been volatile as of late. It’s been ticking up and down based on the month-to-month data, and that’s not unusual for movement from the Purchasing Managers’ Index. We focus on the 112 rate of change, because that 112 rate of change for the PMI or month over month growth rate, has about a 12-month lead time to the economy.

And now as we look at the PMI movement as of late, it’s actually one of the risks to the timing of our industrial production forecast. Based on when the low in the PMI 112 occurred, it suggests the low in industrial production could occur slightly earlier than we anticipate.

We always want to be transparent with you all about risk and supporting evidence to our forecast. So when we look at the ITR leading indicator, when we look at the total industry capacity utilization rate, those indicators are both in support of the current outlook. But the recent PMI movement says, “Hey, that low in industrial production might occur about one quarter than ITR suggests.”

Now, again, we look at a lot more indicators than just the three that I’m mentioning here for the industrial economy, but I wanted to share with you what we’re looking at internally as these leading indicators evolve.

And then the last series I wanted to call out is US retail sales. We’ve also talked about that series in past TrendsTalks, and we have a proprietary ITR indicator, which is called our ITR retail sales leading indicator. And that just ticked up with the most recent data. And that leading indicator is about a 12-month lead time to US total retail sales. And so that upward movement that we saw in the January 2024 data of the leading indicator supports our thoughts that we’ll see retail sales on a 1212 basis start to rise around year end ’24 into early 2025.

So really, all I’m saying here is the majority of the leading indicators are in support of our current outlook. I think it’s important to always take a step back and look at the fundamentals behind ITR’s forecasting, which is in part looking at these highly correlated economic leading indicators. And right now they’re on track with the forecast that we’ve been talking about as of late.

So my comments for 2024 remain the same. There will be some weakness in ’24 that is important to prepare for, but it’s a time to be investing and taking advantage of a slower year in ’24 so that we’re ready to take on this growth in ’25 and ’26. I’ll be back with you all in a few months as we look to see these leading indicators continue to show improvement to support our 2025 outlook, which is that of growth. Again, I’m not concerned about businesses surviving the ’24 downturn. I’m concerned that we’re not prepared for how quickly growth will be resuming as we look out to ’25 and ’26.

I hope you found this episode helpful. Please remember to like and subscribe to TrendsTalk wherever you listen to your podcast. I’m Taylor St. Germain with ITR Economics, and I’m looking forward to chatting with you all on the next one. We’ll talk to you soon.