February 5, 2024

Hi everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this episode of TrendsTalk. We at ITR Economics are your unbiased and apolitical source of economic intelligence. And today I wanted to talk about US industrial production, but really highlight the manufacturing component of industrial production, as well as talk a little bit about those manufacturing verticals that will perform better than others in 2024. Now, for those of you that tuned into the episode where I interviewed our VP of economics, Jackie Greene, you got a little bit of insight into some of these verticals, but I wanted to cover this in more depth here today.

Now first off, what’s very interesting is looking at the relationship between US industrial production versus US manufacturing production, which in this case does exclude motor vehicles. Now the reason this relationship is interesting is because this cycle is shaping up a little bit different from the previous two cycles in terms of the downturns that we’ve been through. Let me explain more of what I mean by that. If you take the annual growth rate for US industrial production and overlay the annual growth rate for US manufacturing production, often the overall US industrial economy experiences some more severe contraction during downturns, at least during the last two cycles when we think of 2015, 2016, that downturn, and then the pandemic downturn.

So let’s linger on that thought. When we typically see overall industrial production, which includes not just manufacturing but mining, utilities, oil and gas, hit lower amplitudes at the low points. But what’s interesting during this cycle as we sit here today is the overall industrial production series is actually still positive year over year while the manufacturing subcomponent is negative. So it’s just different from what we’ve seen in previous cycles, and I think one of the primary reasons for that is what’s going on in the oil and gas industry.

So if you remember ’15 and ’16, again US industrial production had a more severe downturn than just simply manufacturing in the US and that was due in part to oil prices dropping below $30 per barrel during 2015 and 2016, creating a more severe or steeper downturn for the overall IP, industrial production, benchmark that we’re looking at. The same was true as we looked back to that pandemic downturn. We saw US IP dip lower than overall manufacturing as we looked at that low point. But then as we sit here today, as I just mentioned, US IP is still up about 0.2%. It’s certainly slowing, but still up year over year. While manufacturing is actually already in the negative territory. So what’s going on in this cycle?

Well, as Jackie and I discussed last week, oil and gas is actually doing quite well as we sit here today, and that’s due in part to the higher oil price that we’re seeing. And now oil prices are still down year over year. But if you look at the level of oil prices, oil prices are still at a level today that are profitable to incentivize new and existing drilling. So what’s the takeaway from this is oil and gas has been the problem in the last two manufacturing and industrial production downturns, but, and as a result, you’ve seen US IP dip lower than manufacturing. However, because of that elevated oil price as we sit here today you’re actually seeing US IP remain elevated still compared to the manufacturing economy, which is already in a recession.

And again, that brings me to our trends report. For those of you that are subscribers, take a look at that manufacturing at a glance section. It highlights a lot of the different verticals that we’re forecasting for US manufacturing or the US industrial economy at large. And while many vertical market forecasts are in the negative territory, there are some that are less negative than others.

So for example, we’re expecting the US construction machinery market to be down 14% in 2024 compared to 2023. But oil and gas, which I just mentioned is doing quite well overall even as we sit here today, is only projected to be down .8% in 2024 compared to 2023. So you can see still down, but oil and gas .8%, construction machinery about 14%, you can see it’s not all linear, it’s not all equal during this mild recession that we have forecasted for the industrial economy next year. We also see some data series that actually have a lag that will still grow in 2024, aircraft is one of those. If you look at our forecast for civilian aircraft equipment production, we actually have that market growing 4.8% in 2024 compared to 2023.

So really what I’m highlighting here is that despite this overarching downturn in the industrial economy and the manufacturing economy that we’re projecting to really characterize much of 2024, it’s worth taking a look at some of those more granular vertical markets that will be less negative or in some cases, like aircraft, might even grow in 2024 that can offset some of the decline that you might be seeing in some of the other vertical markets that you’re playing into.

One of our management objectives during Phase C, slowing growth, which is where the industrial economy is, or even in Phase D as we’re moving into a recession timeframe, is to look for those countercyclical markets, look for those markets that will also be less negative than others, and focus your time and attention and resources in some of those markets. And again, we can help you with that. Our trends report helps you understand which markets will be performing better than others. So I think that’s the name of the game for 2024 is finding those regions of the world, of the country and those vertical markets that might not be growing year over year but will be less severely impacted by the downturn as we look forward to really the next 12 months.

I hope you found this information helpful. Please like and subscribe wherever you listen to your podcast. Looking forward to seeing you all on the next episode of TrendsTalk. Thanks for your time today. I’m Taylor St. Germain with ITR Economics.