May 5, 2023

Hello, everyone. I’m Alan Beaulieu with ITR Economics and I’d like to talk to you for a few minutes about GDP, and what it means for 2024, and getting ready for 2024. As most of you know, the GDP first quarter preliminary number came out showing an annualized rate of growth of 1.1%. That was widely reported in the media and what the BEA, Bureau of Economic Analysis, said. So can’t fault them for that.

We take a little different approach here at ITR. We look at the constant dollar amount, not the nominal dollar, which is what they’re reporting on. Then on a constant dollar basis, GDP as of the end of the first quarter of ’23, stood at 20 million, 236 billion, and change. That’s 1.6% above the first quarter of 2022. That’s the 3/12 rate of change for those two that are familiar with ITR.

The increase from December to March was 0.26%, and that number was mild, but still normal. So it wasn’t real impressive, but it was okay. When you look at the pieces underneath, there’s certainly reasons to be encouraged about the ongoing growth in GDP for this year, at least for the next two quarters that we’ve been talking about. December to March increase in the GDP deflated with 0.26%, which is mild but still within the parameter of normal. It’s not a wow, but it’s certainly not a bad thing. We are projecting that GDP will continue to grow this year and the underlying numbers certainly support that.

When we look at the GDP for goods, consumer purchases of goods, it’s not a record high. It’s at 5.611 trillion dollars, but it’s just shy of the record high we had in June of 2021, so consumers are doing well. That number is going up. When we look at services, it is a record high $11,840 billion and that number is going up. When we look at net exports, we see something nice going on. Net exports is good and services net of imports and exports and it’s a negative number. Most people know we have a trade imbalance, but that’s less negative than it was a year ago. That’s very encouraging to see and net exports of goods out of the United States are at record high.

Lots of positive things going on and I’m bringing this to your attention because I don’t want you to come across negative news and start internalizing it. Just today I saw another article that talked about the banking crisis as JP Morgan will be purchasing First Republic and they use that word crisis and I cringe. I go, that really sets the tone for something bad going on that there’s some reason for you to be really nervous about the future.

You need to be concerned about 2024 and some people are going to be concerned about the second half of ’23. We cover that in our ITR trends report. We cover that in our presentations. But on a macro basis, late this year, we begin to see industrial production tip downward. Most you already know that.

What I want to talk to you about today is your backlog. It’s a great time to look at your backlog and say to yourself, all right, how much of my future does that represent? Because a lot of new orders trends, the 12/12 rates of change are already in phase C. We see that in manufacturing, the new orders are in Phase C, we see it in motor vehicles. We see what’s going on in different places. That new orders 12/12 is in phase C. As we look at industrial machinery, new orders, the 3/12 is even a minus 2.3% in Phase D.

So if you’re in that segment, for instance, industrial machinery, the last quarter below your level new orders, your unfilled orders are still up. It’s a record high. It’s not record high, excuse me, it’s the highest in 13.5 years, and at $12.6 billion it’s a lot of money. But how long’s it going to last? What is your backlog? You’re going to have to do a calculation here and the best way is to use rates of change and leading indicators. But if your order trend is in phase C and it continues on that pace, how long will that keep feeding your production facility and how long will that keep feeding your workload? What will that do to your revenue as you go forward? If you have very little backlog, then later this year in 2024, it is going to be tougher for you on cash and obviously your revenue can have a tendency to go negative.

If you’re somebody with a six-month backlog, well, the softness then later this year and in the first half of ’24, you’re going to largely ignore because your revenues will be held up by your unfilled orders, by your backlog and your cash will look good. But how will that hold in the second quarter of the year? Knowing how you fit and knowing what your backlog looks like is certainly very important.

For our friends on the services side of the economy if we look at what’s happening, consulting services in general, if we look at what’s happening in the insurance industry, agencies and brokers, if we look at the accounting sectors all in phase C and deselling rating wise has begun. That’s very consistent with what goes on in normal times. It’s very consistent with what’s going on now in this disinflation time. We’ve got incredible run-ups because of inflated prices. Deflation means it’s going to be slowing down in its rate of rise and the economy’s going to be pulling back on some of that natural rise as well. So the folks that I mentioned in a lot of those service industries and service industries in general should be planning on a decelerating rate of rise, which could also impact your cash.

Lastly, besides your cash, besides reasonable expectations, I would like you to be aware of the noise. Next year is a presidential election year. It’s going to be heating up later this year, and as the economy softens, you can expect a lot of noise all over the media spectrum, both sides, everything in between. It’s going to be about how bad the economy is and they’re going to try to create this situation where it’ll win votes for their particular candidate. Please keep in mind that next year’s going to see GDP down just 0.3% from 2022, which will, 2023, excuse me, which will come in as a good year.

So with a minus 0.3% for 2024 compared to a good 2023, that’s hardly a cause for dramatic concern. And we’re going to see a 2.5% increase in GDP in 2025. That 2.5% is a little bit above the average run rate we had for 2019 and a little below the average run rate we have for 2018. So when you’re planning ahead, think, all right, this is going to be somewhere between those two years, what was my year like? You’ll be able to plan ahead with reasoned approach, estimating your cash position and your cash needs as you go forward into a brighter future.

Thank you for listening. I’m Alan Beaulieu. This is another episode of TrendsTalk.