CDI Economic Summary: US economy weighed by manufacturing weakness

CHARLOTTE, North Carolina (ICIS)–Challenging economic conditions continue to be in store for the US chemical industry with weakness in the industrial sector in particular.

Starting with the production side of the economy, the March ISM US Manufacturing Purchasing Managers’ Index (PMI) registered 46.3, down 1.4 points from February and pushing the index into its fifth month of contraction.

New orders and order backlogs fell back even further into contraction territory. Production contracted at a slightly milder pace. Measures of supply chain bottlenecks improved, and prices paid turned negative again.

Meanwhile, the ISM US Services PMI dropped 3.9 points to 51.2, a level indicating a slowing expansion.

The Manufacturing PMI for Canada fell back into contraction during March while that for Mexico featured a second month of expansion. Euro area manufacturing has been in contraction for nine months, the result of an energy shock and other supply chain issues arising from the war in Ukraine.

China was at breakeven levels, and other Asia PMIs were mixed. Moreover, Brazil’s manufacturing contracted for its fifth consecutive month in March.

Turning to the demand side of the economy, light vehicle sales fell for a second consecutive month in March after the sharp rebound in January. Inventories remain low.

After light vehicle sales fell from 15.0m in 2021 to 13.7m in 2022 due to semiconductor shortages, economists see light vehicle sales rebounding to 14.9m units this year before improving to 15.4m in 2024. Pent-up demand will provide support for the auto sector. The latest cyclical peak was 17.2m in 2018.

Homebuilder confidence improved slightly but is still in negative territory. Housing activity has declined since last spring, and the March report indicates the slide continues. Economists project housing starts will fall from 1.55m in 2022 to around 1.20m in 2023 and 2024 before recovering in 2025.

Retail sales volumes were weak in March, with softness across categories. Sales at food services and drinking places advanced. Spending for services is holding up better than spending for goods.

The unemployment rate remains at low levels as job creation continues. There are 1.7 vacancies per unemployed worker, which is still fostering wage pressures. There are, however, signs of slowing job gains.

Consumer goods prices are further deflating. On the other hand, Consumer Price Index (CPI) services inflation remains sticky. In some service industries, rates haven’t peaked at all, but continue to rise.

Prices are now up 5.0% year on year (versus up 8.9% on the same basis in June 2022), but downward progress has been slow. Economists expect inflation to average 4.3% this year, down from 8.0% last year. Inflation is expected to soften to 2.5% in 2024 and 2.3% in 2025.

With services inflation still persistent, the consensus seems to be that the Federal Reserve will likely hike the Federal Funds target rate by 25 basis points at the May FOMC meeting. Disinflation is proceeding slower than anticipated, and the Fed’s quantitative tightening (QT) campaign continues.

The Fed’s survey of senior lending officers indicates that banks are tightening credit, and the recent banking turmoil indicates that it will tighten further and dampen economic activity. Problems with commercial real estate present a risk.

The ICIS US Leading Business Barometer (LBB) has provided a signal consistent with recessionary conditions, but recent readings indicate some stabilisation in this leading index.

For US GDP, after rising 5.9% in 2021 on the strong recovery from the COVID recession and slowing to a 2.1% gain in 2022, economists’ forecasts are for subdued gains in 2023 and 2024 GDP of 1.0% and 0.4%, respectively, making both years challenging. In 2025, US GDP is projected to improve to 2.5%.