ICIS Economic Summary: US economy slowing, not falling off a cliff
Kevin Swift
26-Aug-2024
CHARLOTTE, North Carolina (ICIS)–August started with reports of high weekly initial unemployment claims, a weak manufacturing PMI reading and a lackluster payroll report. Equity markets did not react well to this as evidenced by a three-day sell off. But the panic ended, a rebound ensued and we are back to where we were on 31 July as the underlying economic fundamentals of a late-phase business cycle remain. The economy is slowing, not falling off a cliff.
Job creation continues, even after the softer showing in July and the unemployment rate ticking up to 4.3%, largely the result of Hurricane Beryl. In the latest JOLTS (Job Openings and Labor Turnover) report, there are 1.2 job openings per unemployed, which is down from a year ago.
Overall labor market supply and demand relationships appear to be moving back towards pre-pandemic levels. With a still positive labor market, incomes are holding up for consumers and providing support for the US economy.
The headline July Consumer Price Index (CPI) was up 2.9% year on year, the lowest comparison since March 2021. Progress on disinflation continues and inflation is heading back towards the Fed’s target.
Economists expect inflation to average 3.1% this year, down from 4.1% in 2023 and 8.0% in 2022. This is still above the Fed’s target. Inflation should soften to 2.4% in 2025 and 2026. As a result, interest rate futures overwhelmingly expect the Fed to cut rates in September.
Turning to the production side of the economy, the July ISM US Manufacturing Purchasing Managers’ Index (PMI) registered 46.8, down 1.7 points from June and a reading that was below expectations.
A March expansionary reading had ended 16 months of contraction in manufacturing, but since then the readings have been contractionary. Overall manufacturing production contraction deepened. New orders slipped further into contraction, and order backlogs and inventories contracted at a faster pace. Only five of the 18 industries expanded.
The ISM Services PMI rebounded 2.6 points to 51.4, a slightly expansionary reading.
The Manufacturing PMI for Canada remained in contraction (15 months and counting) during July while that for Mexico contracted slightly after nine months of expanding. Brazil’s manufacturing PMI expanded for a seventh month.
Euro Area manufacturing has been in contraction for 24 months. The UK PMI, however, expanded for a third month.
China’s manufacturing PMI retreated below breakeven levels, ending eight months of positive readings. This is indicative of a stalling recovery.
Turning to the demand side of the economy, light vehicle sales rose in July and although inventories have moved up in recent months, they still remain low.
We expect light vehicle sales of 15.7 million this year before improving to 16.2 million in 2025. We expect sales of 17.2 million in 2026. This would bring activity back to the last cyclical peak in 2018.
Housing activity continues to be tepid amid affordability issues and low builder confidence. We expect that housing starts will average 1.39 million in 2024 and 1.45 million in 2025. We expect housing activity to improve to 1.50 million in 2026.
Demographic factors will support housing activity during the next five or more years. There is significant pent-up demand for housing and a shortage of inventory. Affordability continues to be an issue.
Retail sales have been lackluster so far this year, but the July results were positive, aiding to the strength in equity markets. Sales at food services and drinking places remain positive. Consumers are taking on more debt. Overall consumer spending may be slowing but remains positive.
Business fixed investment, led by a need to boost productivity and reshoring initiatives, will take over from consumer spending as a driver of the US economy. This is typical of a late-stage business cycle.
Taking all of these demand and supply considerations together, it appears that downstream activity is improving and that the severe destocking cycle is ending. A restocking cycle for major resins is emerging.
US real GDP rose 5.8% in 2021 and then slowed to a 2.5% gain in 2022. The much-anticipated recession failed to emerge for a variety of reasons, and in 2023 the economy expanded 2.5% again.
US economic growth in H1 2024 has been strong but is likely to slow, and when it is all said and done, 2024 growth will likely be another 2.5% gain. This pace is well above long-term growth potential.
The slowdown in quarterly economic activity suggests that in 2025, the economy should rise 1.8% over average 2024 levels, followed by a modest 2.0% gain in 2026. The US is once again outpacing the other advanced nations.
Led by the UK and the Mediterranean nations, Europe’s economic prospects appear to be improving. China struggles with soft economic activity and appears to be exporting its way out of its stalled recovery.
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