CDI Economic Summary: US Fed rate cuts delayed on sticky inflation, economic resilience

Joseph Chang

23-Feb-2024

CHARLOTTE, North Carolina (ICIS)–With disinflation having stalled above the US Federal Reserve’s targeted rate, Wall Street expectations of six rate cuts this year have evaporated. Interest rate futures are now moving towards fewer cuts and along the lines the latest Fed “dot plots” of three cuts this year. Any cuts that were to emerge will not happen until May or June.

Starting with the production side of the economy, the January ISM US Manufacturing PMI registered 49.1, up 2 points from December and the 15th month in contraction. Only four industries out of 18 expanded, and weakness remains broad-based. But production moved back into expansion, as did new orders. The latter featured a 5.5-point gain to a positive 52.5 reading. This is always a good sign.

Order backlogs contracted, however, at a faster pace. Both new orders and order backlogs, when combined with the reading on inventories, are good indicators of future activity. Inventories contracted, which could provide a floor for output. The long and deep de-stocking cycle could be ending, with the possibility for restocking this year.

Meanwhile, the ISM US Services PMI improved 2.9 points to 53.4, a reading indicating modest expansion.

The Manufacturing PMI for Canada remained in contraction during January while Mexico expanded. Brazil’s manufacturing PMI improved into expansion. Euro Area manufacturing has been in contraction for 18 months, and the region continues to skirt recession. China’s manufacturing PMI was slightly above breakeven levels for the third month, as its recovery continues to face headwinds. Other Asian PMIs were mixed.

AUTO AND HOUSING OUTLOOK
Turning to the demand side of the economy, light vehicle sales slumped in January due to severe winter weather. This allowed inventories to move up, but they still remain low compared to historical norms. Economists see light vehicle sales of 15.9 million this year before improving to 16.3 million in 2025. The latest cyclical peak was 17.2 million in 2018. Pent-up demand continues to provide support for this market.

Homebuilder confidence remains in negative territory but is improving. Housing activity peaked in Spring 2022 and into mid-2023, with the latest housing reports being mixed. We expect that housing starts will average 1.42 million in 2024 and 1.48 million in 2025. We are above the consensus among economists.

Demographic factors are supporting housing activity during this cycle. There’s significant pent-up demand for housing and a shortage of inventory. Falling mortgage interest rates will also support affordability and thus demand.

RETAIL SALES FALL
With severe winter weather in much of the nation, nominal retail sales fell back in January. Sales were weak across most segments, but sales at restaurants and bars advanced. Spending for services is holding up, but the overall pace is slowing.

Job creation continues at a good pace, and the unemployment rate is still at low levels. There are 1.4 vacancies per unemployed worker. This is off from a year ago but at a historically elevated level, which is still fostering wage pressures in services. Incomes are still holding up for consumers.

INFLATION STILL HIGH BUT WILL EASE
The headline January Consumer Price Index (CPI) was up 3.1% year on year and core CPI (excluding food and energy) was up 3.9%. Progress on disinflation has been made but appears to be stabilizing. Economists expect inflation to average 2.7% this year, down from 4.1% in 2023 and 8.0% in 2022. Inflation is expected to soften further to 2.3% in 2025.

Our ICIS leading barometer of the US business cycle has provided a signal consistent with the “rolling recession” scenario in manufacturing and transportation. The services sectors, however, continue to expand but are slowing. Recent readings show stabilization in this leading index, which is encouraging.

US GDP FORECAST POINTS TO SOFT LANDING
After real GDP rose 5.8% in 2021 and then slowed to a 2.5% gain in 2022, the much-anticipated recession failed to materialize. In 2023, the economy expanded by 2.5% again. US economic growth is slowing from the rapid pace of Q3 and Q4, but those gains will aid 2024 performance which is showing a 2.1% gain.

A cyclical slowdown in economic activity is occurring in 2025, economic growth should average 1.7% for the year.

WEAKER OUTLOOK FOR EUROPE, CHINA
Looking overseas, recent global indicators show slow economic growth and soft commodity prices. Europe is skirting a shallow recession. The conflict affecting Red Sea seaborne trade adds to supply chain disruptions, costs and uncertainty for the region.

Within the context of demographic headwinds, continued property sector woes and soft export markets, China’s economy has lost momentum. The government and Bank of China are responding with stimulus measures.

For more updates and interactive charts, visit our ICIS Topic Page – Macroeconomic Outlook: Impact on Chemicals

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