CDI Economic Summary: US soft landing more likely as inflation eases

NEW YORK (ICIS)–What a difference a year makes! Last year around this time, there was nearly unanimous consensus among economists that the US was barreling into a recession. Today, less than half see such an outcome.

ICIS is forecasting a soft landing with flattish GDP in Q1 and Q2 2024 at 0.0% and 0.1% growth, respectively, a considerable slowdown from the upwardly revised 5.2% gain for Q3 2023.

A soft landing by no means presages a gangbusters rebound. After estimated GDP growth of 2.3% in 2023, ICIS expects a considerable slowdown to just 1.0% in 2024.

Inflation is clearly easing, as is labor market tightness. The latest US Consumer Price Index (CPI) for October was flat from the prior month and up 3.2% from a year ago while the core CPI (excluding food and energy) rose 0.2% month on month and 4.0% from a year ago – the smallest year-on-year gain since September 2021.

While still well above the US Federal Reserve’s target of 2%, inflation’s downward trend means the Fed is likely done raising rates.

The plunge in 10-year Treasury yields to around 4.2% after hitting a peak of around 5% just over a month ago reflects such optimism, including expectations the Fed will start to cut rates by as early as the spring of 2024.

However, a rate cut early in 2024 is unlikely unless there is a dramatic economic downturn. Rate hikes are working and the Fed has been steadfast in its message of higher rates for longer.

Meanwhile, the unemployment rate has ticked up to 3.9% as job creation slows. Consumer spending continues to be resilient but the latest retail sales figure in October showed a 0.1% decline from the prior month, a marked reversal from the 0.9% gain in September. Sales were up 2.5% year on year, but adjusting for inflation, volumes appeared soft.

Notable year-on-year gains were in health and personal care stores (+9.6%), restaurants and bars (+8.6%) and ecommerce (+7.6%), with big declines in furniture and home furnishings stores (-11.8%) and building materials and garden equipment dealers (-5.6%).

Even as consumer confidence measures have remained at lower levels than during the pandemic, largely attributed to high inflation and political and geopolitical uncertainty, consumers continue to spend at a healthy clip.

Services is doing the heavy lifting with manufacturing lagging badly. The latest ISM US Manufacturing Purchasing Managers’ Index (PMI) reading in November was flat at 46.7, marking the 13th consecutive month of contraction (under 50).

The housing market continues to struggle with high mortgage rates still a major headwind. Housing starts rose 1.9% in October from the prior month to an annualized 1.37m pace but were down 4.2% from a year ago. ICIS forecasts housing starts to fall from 1.39m in 2023 to 1.37m in 2024 – well below the recent peak of 1.60m in 2021.

Automotive remains a bright spot with October light vehicle sales easing just 1.2% from September to a 15.5m unit pace – less-than-expected given the UAW strike against the Big 3 US automakers which has now been largely resolved. Sales were up 5.6% year on year and 12.6% year to date. ICIS forecasts light vehicle sales easing from 15.4m units in 2023 to 15.2m units in 2024.

The ICIS US Leading Business Barometer (LBB), a key forward-looking indicator for the US business cycle, was down 0.1% in October versus September, extending to 19 consecutive months of decline. The downward trend over the past year is consistent with recessionary conditions but the recent stabilization in the pace of decline is encouraging.

Additional contribution by ICIS senior economist for global chemicals, Kevin Swift