Corrected: CDI Economic Summary: US economy on dual track as debt ceiling looms

Joseph Chang


Correction: In the ICIS story headlined “CDI Economic Summary: US economy on dual track as debt ceiling looms” dated 24 May 2023, please read in the 8th paragraph …US housing starts rose 2.2% in April to an annualised pace of 1.40m, down 22.3% from a year ago… instead of …fell 1.5% in April to an annualised pace of 1.42m, down 21.1% from a year ago….. A corrected story follows.

NEW YORK (ICIS)–The US debt ceiling drama is intensifying but has yet to send shivers through financial markets in a meaningful way as the consensus ultimately expects this to be resolved. Yet the risk of a default is very real and the potential impact catastrophic. Even if a default is avoided, the brinksmanship could further dent sentiment, putting off major spending decisions by consumers and businesses alike.

This is clearly a dual-track economy, with a manufacturing recession on one side and resilient consumer spending on services on the other. Consumers are still spending, and not surprisingly given the lowest unemployment rate in more than 50 years. They’re just spending on experiences – think travel and dining – and not on durable goods.

US retail sales in April rose 0.4% month on month, and was up 1.6% from a year ago. Notable year-on-year declines in goods categories such as furniture and home furnishing (-6.4%), electronics and appliances (-7.3%) and building materials and garden supplies (-3.7%) were offset by a 9.4% gain in restaurants and bars, and a 7.9% improvement in health and personal care.

With inflation waning, though with the Federal Reserve’s preferred measure – the core Personal Consumption Expenditures (PCE) pricing index (+4.6% in the latest March reading) still well above its 2% target, the Fed is likely done with interest rate hikes for now after an unprecedented tightening cycle in just over a year.

Yet the strength of the labour market remains a concern, as services-related inflation continues to be sticky.  After 5 percentage points of hikes in the benchmark Fed Funds rate in 14 months, amazingly the unemployment rate at 3.4% is even lower than when it started to raise rates.

If inflation perks up, the Fed won’t hesitate to hike again. However, factors are lining up to tighten credit further, giving the Fed breathing room. The failure of another major regional bank – First Republic – and subsequent rescue by JPMorgan Chase, along with continuing stress in the sector, will tighten lending across the board. The coming disaster in commercial office real estate will only exacerbate this trend.

The manufacturing recession is global, evidenced by purchasing managers’ indexes (PMIs) in the US, Europe and China all being in contraction territory (under 50) with the US and Europe in a deep hole. The latest ISM US Manufacturing PMI reading in April improved 0.8 points to 47.1 but represented the 6th consecutive month of contraction. In contrast, the US services PMI remains in expansion mode for the fourth consecutive month.

Housing continues to get squeezed by higher mortgage rates. US housing starts rose 2.2% in April to an annualised pace of 1.40m, down 22.3% from a year ago. ICIS projects starts to decline 19% to 1.26m in 2023 and more or less hover around that level through 2025.

Automotive has been a bright spot, with April light vehicle sales up 7.2% to an annualised rate of 15.9m, which was up 11.4% year on year as supply constraints have eased. ICIS projects an 11% improvement in light vehicle sales to 15.1m in 2023 with a further gain to 15.6m in 2024.

However, our base case for the US economy is still for a mild recession, which could bottom out in early 2024.  Thus, US GDP growth is projected at just 1.1% for 2023, and 0.4% in 2024.

The ICIS US Leading Business Barometer (LBB), a leading indicator of the business cycle, ticked slightly higher by 0.4% in April after 12 months of decline but was down 8.2% from a year ago. The trend remains consistent with recessionary conditions.

Kevin Swift, ICIS senior economist for global chemicals, contributed to this article

Thumbnail image by Shutterstock


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