ICIS Economic Summary: US growth easing along with labor market

Kevin Swift


CHARLOTTE, North Carolina (ICIS)–It is a choppy outlook for the US economy, but much of the data is pointing to a moderate slowdown in growth, as expected.

Job creation continues at an above-trend pace and even after ticking up to 4.0% in May, the unemployment rate is still at low levels. US job openings fell by 296,000 to 8.059 million in April (latest figure). This is equivalent to 1.2 job openings per unemployed. This is off from a year ago when job openings totaled 9.904 million.

Overall labor market supply and demand relationships appear to be moving back towards pre-COVID levels. With a still healthy labor market, incomes are holding up for consumers and providing support for the US economy.

On the inflation front, the headline May Consumer Price Index (CPI) was up 3.3% year on year and core CPI (excluding food and energy) was up 3.4%. Progress on disinflation has stabilized.

Economists expect CPI inflation to average 3.2% this year, down from 4.1% in 2023 and 8.0% in 2022 – still above the Fed’s target. Inflation is expected to soften to 2.4% in 2025 and 2026. As a result, interest rate futures are now for one or two cuts. A case can even be made for no cuts.

Turning to the production side of the economy, the May ISM Manufacturing PMI registered 48.7, down 0.5 points from April and a reading that was below expectations. A March expansionary reading had ended 16 months of contraction in manufacturing but May marks a second contractionary reading.

One step forward, two steps back. Overall manufacturing production fell back to a barely positive reading. New orders slipped further back into contraction and order backlogs and inventories contracted at a faster pace. Only seven of the 18 industries expanded. Demand was soft again and was elusive, output was stable, and inputs stayed accommodative.

Meanwhile the ISM Services PMI rebounded 4.4 points to 53.8, a reading indicating a good pace of expansion.

The Manufacturing PMI for Canada remained in contraction during May while that for Mexico expanded for the eighth month. Brazil’s manufacturing PMI expanded for a fifth month.

Eurozone manufacturing has been in contraction for 23 months, but the region’s economy appears to be expanding again. China’s manufacturing PMI was above breakeven levels for the seventh month. Other Asian PMIs appear to be improving.

Turning to the demand side of the economy, US light vehicle sales rose again in May and although inventories have moved up in recent months, they still remain low.

We expect light vehicle sales of 15.8 million this year, before improving to 16.3 million in 2025. We are above consensus among economists and expect sales of 17.3 million in 2026. This would bring activity back to the last cyclical peak of 17.2 million in 2018.

Housing activity peaked in Spring 2022 and into mid-2023 with housing reports since being mixed. We expect that housing starts will average 1.44 million in 2024 and 1.50 million in 2025 – also above consensus among economists. We expect housing starts to improve to 1.56 million in 2026.

Demographic factors are supporting activity during this cycle. There is significant pent-up demand for housing and a shortage of inventory. Affordability continues to be an issue.

Nominal retail sales were weak during May and prior months were revised downward, suggesting consumers are facing inflation fatigue and guarding their purchases. Sales gains were mixed across segments. Sales at restaurants and bars also weakened. Spending may be slowing.

Our ICIS leading barometer of the US business cycle has providing signals that the “rolling recession” scenario in manufacturing and transportation may be ending. The services sectors continue to expand, but at a slower pace.

Real US GDP rose 5.8% in 2021 and then slowed to a 2.5% gain in 2022. The much-anticipated recession failed to emerge for a variety of reasons and in 2023 the economy expanded 2.5% again. US economic growth in Q1 2024 slowed from the rapid pace of Q3 and Q4 2023, but those gains will aid 2024 performance of an expected 2.3% gain.

The slowdown in quarterly economic activity suggests that in GDP growth should be 1.8% in 2025 and 1.9% in 2026.

The US once again is serving the critical role of global economic growth engine. The recent rate cut by the European Central Bank (ECB) should provide a small lift to Europe’s economy.

China is struggling with soft economic activity and appears to be exporting its way out of the mire. India and to a lesser extent Japan, are showing signs of resilience as the major players in the world economy diverge.


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