CDI Economic Summary: US soft landing in effect but rough start for chemicals

NEW YORK (ICIS)–Kicking off the year, hope springs eternal with optimism for a US and global economic recovery in 2024. Indeed, our ICIS base case calls for a soft landing in the US with the Federal Reserve prepping for interest rate cuts through the year while consumer spending remains resilient. However, it will likely get worse before it gets better, with conditions potentially bottoming in Q2.

ICIS projects US GDP to decline from a stronger-than-expected 3.3% in Q4 2023, potentially bottoming by Q2 2024 as lag effects from the Fed’s prior rate hikes take hold. A mild recovery could emerge by H2 2024, bringing full-year 2024 GDP growth to around 1.6% – still down from 2.5% in 2023.

Inflation is steadily easing, but remains sticky, especially on the services side. The US Consumer Price Index (CPI) in December was up 3.4% year on year with core CPI (excluding food and energy) up 3.9%. However, the Fed’s preferred measure – the core personal consumption expenditures (PCE) price index – was much more subdued at +2.9% for December.

While the Fed itself expects three quarter-point rate cuts by the end of 2024 and the financial markets even more, the Fed is unlikely to start cutting with core inflation this elevated and the unemployment rate at 3.7%. The timing of the first cut is very much under debate, and our best guess is some time near the summer.

The US consumer is still in the game with US retail sales up 0.6% month-on-month in December and up 5.6% from a year ago. Notable year-on-year gains were in bars and restaurants (+11.1%), electronics and appliance stores (+10.7%), health and personal care stores (+10.7%), motor vehicle and parts dealers (+10.3%), and ecommerce (+9.7%). Lagging categories included gas stations (-6.6%) and furniture and home furnishing stores (-4.7%).

It’s a different world in the manufacturing sector which is still firmly in recession. The ISM US Manufacturing Purchasing Managers’ Index (PMI) in December improved slightly to 47.4 from 46.7 in November but was in contraction (below 50) for the 14th consecutive month. On the other hand, the Services PMI has seen 12 consecutive months of expansion, although momentum is waning.

In line with overall manufacturing weakness, it looks to be a rough start to the year for the chemical industry, with a number of companies issuing profit warnings, including DuPont and Huntsman.

DuPont not only cut Q4 2023 sales and earnings estimates but also guided to sequentially lower Q1 2024 results, citing weakness in its industrial businesses and China. Dow sees Q1 sales relatively flat versus a better-than-expected Q4.

The US chemical sector may not get much help in 2024 from its two key end-use markets – housing and automotive. ICIS projects light vehicle sales to rise just slightly to 15.7 million units in 2024 from 15.5 million units in 2023, while housing starts are expected to be flat at 1.40 million in 2024 versus 1.41 million in 2023.

For December, US light vehicle sales improved 3.2% to a 15.8 million unit pace, which was up 7.4% from a year ago. Housing starts in December fell 4.3% to a 1.46 million annualized rate.  However, the total is 7.6% above a year ago.

The ICIS US Leading Business Barometer (LBB), a key forward-looking indicator for the US business cycle, ticked up 0.1% in December, ending 21 months of decline. The trends of the past year are consistent with recessionary conditions, but the recent stabilization is encouraging.

Meanwhile, geopolitical uncertainty and disruptions to shipping in the Middle East will continue to be a headwind for the global economy. The shipping and supply chain disruptions are inflationary, throwing another obstacle in front of central banks preparing to ease monetary policy.

As the earnings season chugs along, we’ll get a clearer picture on the outlook for the chemical sector and the overall manufacturing economy. Early indications are far from encouraging.

Additional contribution by ICIS senior economist Kevin Swift

For more updates and interactive charts, visit our ICIS Topic Page – Macroeconomic Outlook: Impact on Chemicals