CDI Economic Summary: US Fed expects to stay on course with three rate cuts

NEW YORK (ICIS)–The US Federal Reserve is sticking to its forecast of three quarter-point rate cuts this year and is now planning to soon slow the pace of its quantitative tightening (QT) program of draining liquidity from the financial system to the tune of $95 billion a month – all good news for the overall economy and the chemical sector.

Economists are becoming more sanguine on the outlook with upward revisions to 2024 GDP forecasts, though inflation expectations are also ticking a bit higher.

ICIS projects US GDP growth of 2.2% for 2024, down from 2.5% in 2023 – a year in which every economist forecast a recession. However, growth is expected to slow from the surprisingly strong 3.3% pace in Q4, bottoming out at 1.2% in Q2 and Q3.

US GDP forecasts – a soft landing

Source: US Bureau of Economic Analysis, ICIS forecasts

Inflation is easing, but the road will be bumpy with services pricing remaining sticky and goods prices potentially slowing in their pace of decline. On the services side, rents have been stubbornly high. The US Consumer Price Index (CPI) in February was up 3.2% year on year with core CPI (excluding food and energy) up 3.8% – still too high for rate cuts.

Forecasts for the timing of the first cut are coalescing around the summer with June a distinct possibility.

US retail sales came in weaker than expected, rising 0.6% month on month in February and up just 1.5% from a year ago. Notable year-on-year gains were in ecommerce (+6.4%) and bars and restaurants (+6.3%). Declining categories were led by furniture and home furnishing stores (-10.1%), building material and garden equipment dealers (-6.1%) and gas stations (-4.5%).

The labor market remains healthy with the unemployment rate at 3.9% and wage gains continuing.

While the US economy overall has proven resilient, the manufacturing sector is still in recession. The ISM US Manufacturing Purchasing Managers’ Index (PMI) in February fell to 47.8 from 49.1 in January, its 16th consecutive month in contraction (below 50). On the other hand, the Services PMI has seen 14 consecutive months of expansion.

The chemical industry is off to a tepid start to 2024. Dow reiterated its forecast of flat Q1 sales versus a better-than-expected Q4 that was bereft of the usual seasonal destocking, as inventories had already been drawn down. Indeed destocking in the chemical sector is now largely done. LyondellBasell sees “modest improvement” in Q1 with solid demand for polyethylene (PE) domestically and in the export market.

The outlook for two key end markets is brightening somewhat. ICIS projects housing starts to rise from 1.42 million in 2023 to 1.47 million in 2024 and 1.50 million in 2025. Light vehicle sales are expected to rise from 15.5 million units in 2023 to 15.9 million in 2024 and 16.4 million in 2025 – still below pre-pandemic levels of 17.0 million in 2019.

US housing starts in February jumped 10.7% to a 1.52 million pace – up 5.9% year on year, with January figures also revised higher. Light vehicle sales rebounded 6.0% to a 15.81 million unit pace in February.

Meanwhile, geopolitical turmoil and disruptions to shipping in the Red Sea will continue to be a headwind for the global economy. With major elections worldwide this year, including in the US, the chemical industry is on watch for policy shifts in regulations as well as trade. The reshoring/deglobalization trend is on the ascent – hand in hand with protectionism as global competition intensifies.