Economic Advisory Report: January 2023

February 1, 2023Duration: 10:54

This quarterly economic report, published by ITR Economics, features data specifically for the material handling industry to assist MHEDA members plan for the year ahead. The full detailed report is available to members only. Order and download the new report as well as past archived issues (requires member login).

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Podcast Transcript:

Good morning, everybody. This is Eric post. I’m the director of research and development here at ichar economics, and I wanted to welcome you this morning to go over our report for MHEDA for January 2023.

A Chart for the US industrial production index that’s in your report. And this is a annual average. So 12 months moving average for industrial production. That’s three quarters manufacturing activity and about a quarter of Mining and utilities activity. So those three components and what you can see is in the dark blue the actual data the Great Recession the 15 16 oil price collapse covid and then the rise that we’ve been on here and then in the teal bars, you can see our forecast and as you can see from that forecast, you can see we have a bit more growth here to go but it really starts to flatten out here and then pretty soon we’re going to be seeing some decline in US industrial production.

That’s a change to our Network economic Outlook from the prior report. And I wanted to really start there because as you’ll see in a number of the markets for you all when you look at 2024 here, you’ll see a lot of negative growth rates. You also see some growth rates that are positive but very subdued compared to what they’ve been in the past. So 3.7% growth for e-commerce retail sales that series is usually growing a much more rapidly than that. So why are we seeing a bunch of macroeconomic softening happening in 2024? So to answer that question, I wanted to look at interest rates and the answer in a word is the Fed.

I guess that’s two words, but the Federal Reserve has pushed up interest rates short-term interest rates. And that’s the teal line here incredibly quickly an incredibly sharply. Just look at how sharp the slope of this teal line is compared to Prior instances here of even when we raised interest rates rather substantially before the Great Recession nowhere near sharp of Rise as we’ve experienced in this cycle. And so that has led to what we’ve been warning of for some time, which is this idea of an inverse yield curve where short-term rates now have surpassed long-term rates. That’s the Navy line and anytime that happens you can see there’s two times in the history here where that clearly happened first is a sustained period of time that are Circle prior to the o102 recession and prior to the Great Recession.

After that occurs, we almost always see a recession. It’s about a 80 88% probability or so that once we see this inverse yield curve. We’ll see a recession the typical lead time though is not instantaneous. It’s not like the yield curve converts today and tomorrow we’re in recession. Usually the way it goes is you’ll curve inverse today, and we’re in recession about a year from now.

So that’s why when you look again to go back to your forecast for industrial production. We have a little bit more rise left. It’s pretty muted. We’re definitely in the slowing growth phase here the business cycle.

Slowing growth developing to flatness and then developing into this decline. So again, just that the speed and severity of those interest rate hikes by the federal reserver are putting us in that situation where the economy basically cannot handle those interest rate hikes. We’ve already seen that really clearly that developing some markets like the housing market for example is the most clear example of where really New Home Building for example has taken a big step back home sales of taking a big step back as mortgage rates increase substantially, but we’ll be seeing that effect trickle through to other areas of the economy. Unfortunately and some of those the industrial areas of the economy more consumer oriented areas the economy that making numbers play in so that’s really the big story from today is what you’ll be seeing in this report is some downside related to that. In 2023, particularly the second half of the year is going to be weaker than the first half of the Year here and then moving into 2024 when the bulk of those interest rate increases are going to be hitting the economy because it takes time for those interest rate hikes to actually impact economic activity.

Then 2025 you’ll see is generally a year of growth and exception here being a private Warehouse construction. And that’s just because that segment lags the economy non-residential construction is a lagging segment to the economy. So that that’s why you see the negativity here, but otherwise generally speaking a lot of green that’s for phase B accelerating growth and a lot of higher growth rates in 2025.

So just just to look here at your markets right now. The thing that is interesting to note is three of your markets are in Phase be accelerating growth light vehicle production, which is bouncing back from all the supply chain woes of earlier in the covid period us food production largely the same situation where now we’re starting to really be able to see some rise there.

An e-commerce retail sales, that’s really an inflation-driven phenomenon. As you can see here will be ending 2023 and slowing growth and more significant slowing in 2020 Ford. But otherwise, the more industrial focused markets here are already in Phase sea slowing growth in their heading into that phase-d recession period we think that the recession is going to be relatively mild and there’s a few reasons for that.

One is there’s a lot of reshoring activity that’s occurring firms are moving their operations to the United States to get rid of that supply chain risk that we saw so clearly come to the four During the covid period so that’s that’s a relative Tailwind that’s going to help.

Work against some of these headwinds from the Federal Reserve and the interest rate environment. Another is we really have a pretty strong consumer base here in the United States when you look at the labor market, it’s very strong. If you want a job you can get a job wage growth is healthy. In fact, the Federal Reserve is worried. It’s perhaps too healthy, but that’s a good thing going into a recession.

You don’t want to see poor wage growth going into recession or become, you know, significantly more important. We’re not in that situation. Now loan delinquency rates are really really low that’s really different than having into the Great Recession alone could see rates were really starting to rise people had unhealthy debt load relative to their incomes Pride. Pretty Great Recession. We don’t have that scenario today. And so we’re going to be seeing more mild the clients think of the early 2000s if you were around then in the business world or just as a kid or Never that was for you. You can kind of think back on that as an example of this is not it and end all recession like the Great Recession. It’s more of a mild recession, but certainly a recession nonetheless early 90s, for those of you who happen to remember that recession that is another peer to what we are likely to go through here in 2023-2024. Particularly 2024.

So this is a manageable recession and you what you really need to be thinking about as how can you plan to manage your cash through this manage your expenses make sure that you are not over leveraged certainly that you have the access to the credit that you need.

Capital that you’ll need to get through this but it is not a a significant Nearly as a significant event as the Great Recession, so they’re still going to be Investments that make sense. What we really want you focused on it has not changed and that’s margins margins margins. We have so many cost pressures labor costs in particular. We’ll get some relative relief here as as the recession takes hold but only relative relief when you look at the demographics of the United States, especially for the manufacturing sector, it’s really really rough and we’re going to be having people retire and then you workers. There’s just not enough for them coming into the manufacturing space to make up for that. So it’s gonna make for an expensive labor pool.

Sort of take the five-year view or so. So some of those Investments to save on efficiency. Be more efficient save on labor costs. Some of those will still make sense, but you want to make sure you have a quick Roi.

And you also want to make sure that that’s not going to jeopardize your liquidity at the bottom of the cycle. So really largely the same from that perspective just perhaps some type slightly tighter purse strings as we move especially into 2024 knowing that we’re not going to get as quickly of a recovery because of that infrastrate overhang.

That that’s really it from us here at ITR. We really just want to make sure that you all are comfortable with why we changed our macroeconomic Outlook related to the Federal Reserve Act behavior and really encourage you to continue to watch with us as we monitor what happens with that inverse yield curve. That’s going to be the key to this whole thing is what is the Fed do here as 2023 develops. Do they see the inflation is easing as we’ve been calling for for some time and back off on those interest rate hikes and even and but cut interest rates and allow that yield curve to revert back to positive normal activity.

That’s what we want to see by the end of this year and we’ll certainly be updating you as we go through this time on what’s happening there.

Well, thank you so much. And please feel free to reach out if you have any questions.