CDI Economic Summary: Falling inflation to stabilize economies but US consumer spending to slow

Kevin Swift


CHARLOTTE, North Carolina (ICIS)–Inflation is falling faster than expected across most economies, leading to a turning point in central banks’ two-year battle against surging prices. This turning is now fueling expectations that central banks could pivot to cutting interest rates in 2024.

The economies of both China and Europe have lost momentum. Falling oil and other commodity prices are indicative of a sluggish global economy.

China’s recovery has been hampered by its property sector, high debt, high youth unemployment and soft export markets. The demographic profile is aging rapidly, which is hindering consumer spending.

China’s manufacturing Purchasing Managers’ Index (PMI) hovers around breakeven levels and 2024 activity will likely be slower than in 2023. Other Asian PMIs have been mixed.

Euro Area manufacturing has been in contraction for 17 months and Europe’s economy appears to be in recession. Europe is also aging rapidly.

Turning to the Americas, the pattern is mixed. The Manufacturing PMI for Canada remained in contraction during November and Brazil manufacturing also remains in contraction. Mexico’s manufacturing has rebounded as the nation’s manufacturing sector is being aided by re-shoring.

The US remains an outlier with Q3 economic growth well above trend. Excess savings accumulated during the pandemic are now depleted, and with low consumer confidence, consumer spending appears to be slowing.

The November ISM US Manufacturing PMI registered 46.7, unchanged from October and the 13th month in contraction. Only two industries out of 18 expanded. The weakness was broad-based among manufacturing, with production falling back into contraction. New orders contracted and order backlogs fell even further into contraction territory. The latter two are good indicators of future activity. Inventories contracted at a slower pace, which could provide a floor for output.

The ISM US Services PMI eased 0.9 points to 53.6, a reading indicating slowing expansion. The US “rolling” recession scenario continues to play out but at a more moderated pace.

Consumer prices are further disinflating and are now up 3.1% year on year. But looking at three- and six-month annualized gains, inflation is at a pace desired by the US Federal Reserve.

Economists expect US inflation to average 4.2% for 2023, down from 8.0% last year. Inflation is expected to soften to 2.6% in 2024 and 2.3% in 2025. Real interest rates are now at tight levels and the consensus is for rate cuts in 2024. Wall Street seems to believe that six quarter-point rate cuts are in order, but three cuts are more probable.

US homebuilder confidence remains in negative territory. Housing activity peaked in Spring 2022 and has since declined. The latest housing reports have been mixed. Housing starts were 1.55m in 2022 and 1.61m in 2021. The consensus among economists is that housing starts will fall to 1.40m for all of 2023 and 1.37m in 2024. A recovery should lead to 1.46m starts in 2025.

Demographic factors are supporting activity during this cycle. There’s significant pent-up demand for housing and a shortage of inventory. Moreover, falling mortgage interest rates will also support demand as evidenced by the November housing report.

A stabilizing and eventually improving level of housing activity will foster demand for polyvinyl chloride (PVC) and polyurethanes, as well as a wide variety of adhesives, sealants, and coatings.

US light vehicle sales eased again in November and although inventories have ticked up, they remain low. After sales falling from 15.0m in 2021 to 13.7m in 2022 due to semiconductor shortages, light vehicle sales should improve to 15.4m units for 2023.

Economists see light vehicle sales of 15.2m in 2024, before improving in 2025. The latest cyclical peak was 17.2m in 2018. Despite soft economic fundamentals, pent-up demand could provide some support for this market.

Our ICIS Leading Business Barometer (LBB) of the US business cycle has provided a signal consistent with recessionary conditions as the rolling recession scenario continues to play out in manufacturing and transportation, and to a lesser extent in housing.

Services sectors, however, continue to expand but are slowing. Recent readings show stabilization in the LBB leading index which is encouraging.

After US real GDP rose 5.8% in 2021 and slowed to a 2.5% gain in 2022, economists expect a 2.4% gain for 2023. In 2024, economic growth is expected to slow, averaging 1.1% for the year before rebounding 1.5% in 2025.

Looking overseas, recent indicators show economic growth at a crawl and commodity prices remaining weak. Much of the softness is due to structural weakness in China, a recession in Europe, and a cyclical slowdown in the US.

Despite progress in European inflation, the European Central Bank (ECB) is not as dovish as the Fed. Should easing occur, Europe’s shallow recession will then begin to recover. Our ICIS LBB for the global business cycle has provided a signal consistent with soft economic conditions.

Global economic growth is expected to average 2.4% for 2023, a slowing from the 3.0% pace in 2022 and the 6.1% pace in 2021. In 2024, growth is expected to average 2.3% and in 2025 improve further to a 2.8% gain.


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