with Taylor St. Germain


Join us for the first episode of TrendsTalk in the new year! ITR Economist Taylor St. Germain reviews 2023 through the lens of three key economic datasets and discusses what is to come in 2024.



The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi everyone. Welcome to Trends Talk, your unbiased look into the economy and how it impacts you. Happy New Year to everyone, welcome to 2024. Sincerely thank everyone for watching over the past year, I really appreciate it. A lot of new and exciting things coming our way in 2024 on Trends Talk.

This week, we’re going to look at 2023 in review. I wanted to reflect a little bit on the year passed, but really talk about where we’re going. And I wanted to do this through three different data sets, three different economic topics. Those topics would be the economy, so our forecast for US industrial production are one of our major macroeconomic benchmarks. I wanted to talk about employment and inflation. Those are always three hot topics for any economist, where’s the economy headed? What does that mean for employment and what does that mean for inflation, especially given this inflation environment we’ve been dealing with over the past few years?

Let’s start as high level as we can with a series like US industrial production. Again, it’s one of our major macroeconomic benchmarks. We’ve talked about US industrial production on two or three episodes throughout 2023, but I think it’s important to start with some of our headline forecasts as we reflect on 2023 and look ahead to 2024. So if we look at the US Industrial Economy, and again, just as a reminder for everyone, the reason I spend so much time on industrial production rather than a series like GDP is because industrial production really isolates that manufacturing, mining, and utility side of the economy, which often proves to be a much better indicator for all of the clients that we work with here at ITR.

So let’s start with where we’ve been. If you look at the industrial economy’s growth rate, the annual growth rate, the 12/12 rate of change, in January of 2023, the first month of 2023, that growth rate was sitting at 3.3%, a positive 3.3%. Now if we look at how that growth rate performed throughout the year, with each month in 2023, we saw that annual growth rate decelerate. And as we’re sitting in the fourth quarter of 2023, which is the most recent data that we have, of course the data lags by about a month so we’ll have some 2024 numbers coming shortly, but as we look at the wrap up of 2023, we saw the annual growth rate retreat to about 0.2%. So we went from 3.3% annual growth to just 0.2% on a 12/12 rate of change. And if you actually look at some of the other internal metrics such as the month-over-month growth rate or the quarter-over-quarter growth rate, the 3/12 rate of change for the economy, that was negative by the end of 2023.

As we talked about in 2023, there’s macroeconomic headwinds. The economy slowed down throughout 2023, even to the point where by the end of the year some of those growth rates were showing negative numbers, the moving averages started to show decline. And that’s representative of this downturn that ITR Economics has been projecting for 2024. And so that’s the story of 23 in terms of the economy. We continued to see the headwinds, higher interest rates, higher inflation, a little bit of pain on the consumer side, business profits slowing or even declining for some industries.

And that leads us into our expectation for 2024, which is continued negative growth rates for the US industrial economy. So as we look ahead to 2024, we do expect that annual growth rate to continue to decline really throughout the majority of the year. By the end of 2024, we expect that that growth rate will be down around about minus 3.5%, which indicates this mild recession we’ve been discussing for quite a few quarters now.

What does that mean? Well, that means for businesses out there, growing simply by riding the wave of the market or organic market growth is likely not going to afford you positive growth in 2024. You’re going to have to focus on market share, focus on some of the cost saving side to improve your margins and go out and generate some of this business. We simply can’t ride the wave of the macroeconomy because the macroeconomy will be contracting in 2024. Our low point for US industrial production is December of 2024. It’s a mild downturn. It’s certainly not the minus 12.5% we saw in the financial crisis, but it’s a shift in thinking, which is that the market was offering a lot of opportunities for growth in ’21, ’22, and even the majority of ’23. But as we start to see those growth rates turn negative, it’s going to be on us internally to really go out there, find those opportunities and generate that growth in ’24.

So that’s the overall macroeconomic picture. Now, I wanted to discuss inflation as well. Inflation has been a challenging conversation over the past three years, very high inflation environment, lots of price increases. But then as we moved into 2023, we really started to see inflation slow down, which was good news in many cases because we’ve seen a lot higher interest rates over the past year and a half as a result of the higher inflation. But if we look at where we were at the beginning of the year in terms of the US Consumer Price Index, which is in one of our Trends Report series and forecast, so please check that out. But if we look at where the month-over-month growth rate for inflation was back in January of 2023, it was at 6.4%. And then as we fast-forward to the end of 2023, we saw that growth rate slow down to about 3.1%.

So it’s clear that inflation is coming down. And again, even though that means more challenging pricing conversations as we move forward, and folks will be less receptive to price increases, it means likely we’ll get some lower interest rates next year, which if you listen to our Fed Watch podcast with our CEO Brian Bolio, he’s been talking about this projected interest rate decline that the Federal Reserve will likely implement in 2024. And our inflation forecast for 2024, if you look quarter-over-quarter, suggests that that consumer price index will slow down to even below 2%, hitting about 1.5% at the low in the second half of 2024, again, which is good news in terms of the Federal Reserve bringing those rates down next year. So we have a macroeconomic recession in industrial production that I’ve highlighted, we have inflation continuing to slow down, which will likely result in those interest rates coming down.

Now again, there’s the other side of the coin, which is that as producer inflation is down in 2024, it might be much harder for businesses out there to pass through price increases and so protecting margins in 2024 is going to continue to be something we’re discussing in great detail with our clients because we’re losing a little bit of that pricing power, the ability to increase prices as many of these inflation metrics come down.

The last series I wanted to review is employment labor challenges are one of the most prominent topics or areas of discussion when we’re having our reviews with our clients. And the conversations are typically this really tight labor market makes it challenging to hire, attract, and even retain employees, not to mention a little bit of a margin squeeze as we’re passing through some high wage increases over the past few years.

So if you look at our employment data set, I’ll refer to this one in terms of annual growth rates as well. Also, employment is another Trends Report series. So you can check this forecast out in our monthly Trends Report, but if we look at January 2023, employment was at 4.7% on that annual growth rate, positive 4.7%. As we fast-forward towards the end of 2023, that growth rate slowed down to 2.5%. And what we’ve heard from many of our clients is it’s a little bit easier today to hire and even retain than it was in ’21 and ’22. And that’s very indicative of the fact that this labor market is beginning to slow or has been slowing for the majority of 2023.

Now, as we look forward to 2024, you hear mild recession, you hear inflation coming down, and we also have the labor market cooling off. If you look at 2024 compared to 2023, we expect private sector employment to actually contract year-over-year, again, only down about 0.3%. So we’re not talking all of a sudden of this major labor market contraction where all this labor becomes available, but a continued cooling off in the labor market. And we actually don’t see the low in labor until 2025, the middle of the year. And that’s because the labor market lags about six months behind the economy.

So what does all this mean? Well, that means that there will be some individuals available for hire as we see some of those negative growth rates manifest themselves in the labor market. Again, this isn’t all of a sudden there’s going to be all this labor available for you because of how mild this downturn in 2024 is, but there will be businesses that aren’t prepared and it’s important to capitalize on maybe competitors that aren’t prepared, industries that go through more severe downturns that will be implementing some layoffs, or there will be more folks available for hire. So 2024 will be an important time to be focusing on finding some of those A and B players to hire and bring into your business and have trained up so when the economy accelerates again in ’25 and’ 26, those employees are ready to go trained up, and you find yourself in a much busier time in ’25 and ’26. So that will be quite helpful.

So I just wanted to review now that we’ve discussed these three data sets. The industrial economy is contracting in 2024, it’ll be an important time to implement strategic initiatives to improve market share, to introduce new products, even maybe a great merger and acquisition time to outperform the negative headwinds of the economy. You’ll have to stimulate some of that growth internally, you won’t be able to just ride the wave of the market. When you look at inflation, understand inflation is coming down, that likely means lower interest rates. And so for those of you that are looking to invest using lower interest rates, look to 2024 and 2025 as a time to take advantage of lower borrowing costs. But also understand as inflation comes down, we won’t simply be able to compete on price. We’re going to have to focus more on the cost saving side and pull some other to make sure we’re protecting our margins. And then finally, as I just mentioned with employment, look to some of those industries that will be adversely affected by this downturn so that you can capitalize and bring in some additional talent in 2024 to train and have prepared for the growth in the economy that comes back in 2025 and in 2026.

And with that, it’s time to wrap up. If you found this information helpful, if it’s helped you straighten out any concerns that you may have had before, I’d love for you to like and subscribe to the show wherever you digest your podcast here today. Thanks again for joining me today, I’m looking forward to 2024 with all of you. Like I said, new and exciting things coming for Trends Talk, but we’ll continue to bring our unbiased view on the economy to drive profitability and reduce your risk. My name’s Taylor St. Germain with ITR Economics. Thanks for joining me today, and we’ll see you on the next episode.