ICIS Economic Summary: Confidence rises on ‘soft or no landing’ scenario for US economy

NEW YORK (ICIS)–Economists are growing ever more confident on a soft landing for the US as they continue to ratchet up growth forecasts – now to the point where it’s hardly a landing at all. After all, consensus estimates for 2024 GDP growth at 2.4% are nearly on par with the 2.5% gain seen in 2023.

ICIS likewise forecasts US GDP growth of 2.4% for 2024. On a quarterly trajectory, growth is expected to bottom out in Q3 at 1.3%.

Source: US Bureau of Economic Analysis, ICIS forecast

Softer consumer price index (CPI) inflation data, weak retail sales and a Services PMI (Purchasing Managers’ Index) moving into contraction have renewed hopes of rate cuts by the Federal Reserve – the consensus now being two cuts this year, starting in September.

The core CPI coming in weaker than expected at 3.6% for April versus 3.8% in both March and February kicked off the latest bout of optimism, quickly sending 10-year Treasury yields down below 4.5%.

Retail sales in April were flat from March and up 3.0% year on year – well below expectations and down from a 0.6% monthly gain in March. This suggests consumer spending is slowing in the face of slower job and income gains, and lingering inflation.

Source: ICIS forecasts

Notable year-on-year gains were in ecommerce (+7.5%), miscellaneous store retailers (+8.8%) and restaurants and bars (+5.5%), while declining categories were led by furniture and home furnishings (-8.4%), sporting goods, hobby, musical instruments and books (-4.7%) and building materials and garden equipment (-1.0%). This highlights weakness in consumer discretionary purchases – a key point cited by big box retailer Target in its Q1 results.

Services inflation has been the sticking point, but relief may be ahead. The ISM US Services PMI in April dipped into contraction (below 50) for the first time in 16 months, dropping to 49.4 from 51.4 in March.

Meanwhile, the ISM US Manufacturing PMI also dipped into contraction, with a reading of 49.2 in April after expanding in March for the first time in 17 months to 50.3. After a long period of industrial recession, there are green shoots of a manufacturing revival, but the road ahead looks bumpy.

Chemical companies posted somewhat better-than-expected Q1 earnings and guided to a seasonally stronger Q2 and a gradual recovery for the rest of the year, with growth and resilience in the Americas, stabilization in Europe and slow recovery in China. However, weakness in US housing and durables continues.

Rate cuts could jump-start demand in both as higher sales of new and existing homes in turn spurs spending on durables such as furniture, carpets, consumer electronics and appliances. So far, many people seeking to move are simply locked into their homes because of low-rate mortgages secured or refinanced years ago. Buying another home would essentially double their financing costs.

US housing starts jumped 5.7% in April to a 1.36 million unit pace, with gains in the multi-family segment. In the single-family segment, starts eased 0.4% to a 1.03 million unit pace. April starts were off 0.6% year on year. ICIS projects housing starts to rise slightly from 1.42 million in 2023 to 1.45 million in 2024.

Meanwhile, light vehicle sales rose 1.1% to a 15.74 million unit pace in April and were up 0.4% year on year. ICIS projects a slight gain in light vehicle sales, from 15.5 million units in 2023 to 15.8 million in 2024.

The ICIS US Leading Business Barometer (LBB), a key forward-looking indicator for the US business cycle, ticked up 0.1% in April – the second gain in the past three months following a 21-month stretch of declines. This appears to be signaling improving conditions in manufacturing and some transport industries.

The greatest risk to the improving economic outlook is an external supply shock. With heightened geopolitical tensions around the world and an increasing trend towards protectionism in markets, this bears watching closely.