b'ECONOMIC UPDATE Macroeconomic OutlookIndustry Snapshots US Real Gross Domestic Product in the second quarter came in A Closer Look: The US Economy 2.6% above the prior year. However, while consumer and business-Arrow denotes 12-month moving total/average direction. to-business spending trends are above the year-ago level, the Interest Rates, Yield Curves, and Downgrades, Oh My! economy is slowing.LAUREN SAIDEL-BAKERWe anticipate that the headwinds currently facing the economy will What you need to know: Noise is likely to increase as the political season picks up. Do not equate headlines with economic RETAIL SALES eventually prevail. Our expectation is for a mild recession for the fundamentals overall economy in 2024. Industrial Production will generally decline next year, and we anticipate two quarters of real GDP contraction WHOLESALE TRADE in 2024 as well. The signs of upcoming decline are varied and widespread. Interest rates, at their highest level in decades, are Far from the quiet summer ideal, full of out-of-office messages and calm markets, July and August of this year have been a time of attention-creating higher borrowing costs, which is contributing to slowing grabbing headlines. Both consumers and businesses are becoming more cautious amid high inflation, still-rising interest rates, and several macroeconomic demand. On the consumer side, which makes up lackluster data releases. However, the alarmist headlines should not signal concern for business leaders who have been planning for a mild AUTO PRODUCTION more than two-thirds of US Real Gross Domestic Product, finances recession in 2024. These developments, while unpleasant, are typically associated with the back side of the business cycle. are weakening. Excess savings, which were built up during the pandemic, have been eroded by general spending and rising prices; GOVERNMENT FISCAL POLICY LEADS TO RATINGS DOWNGRADE, BUT THIS IS NO SURPRISEconsumers are leaning more heavily on debt to fund their spending. In early August, Fitch Ratings downgraded the US long-term credit rating from the highest-possible AAA rating to AA+, citing the countrys MANUFACTURING While metrics like credit card delinquency rates are rising, they mounting debt burden and lack of political will to address the deficit. This downgrade follows fellow rating agency S&Ps downgrade of the remain well below the levels leading up to the Great Recession, US in 2011 for similar reasons. Almost at the same time, the US Department of the Treasury increased its borrowing estimate for the current which supports our expectation that the downturn next year will fiscal quarter to over $1 trillion. In tandem, these factors will likely affect near-term US Treasury yields in a way that could be read as spooking not be a repeat of that period.investors.ROTARY RIGWe anticipate that the headwinds currently facing the While these concerns are valid, they relate to the longer-term outlook rather than the immediate future. As such, we do not expect a significant economy will eventually prevail.impact on the 2024 recession. The mounting US government debt load is a key factor in our long-held outlook for a depression around 2030. CAPITAL GOODSInstead, we will be tracking the ongoing yield curve inversion as a gauge of near-term market sentiment. ITR Economics preferred comparison Decline next year will not be felt evenly. Industries which rely morethe 10-year to 3-month yieldremains inverted as of this writing. If the yield curve does not normalize by late this year or early next year, thisheavily on financing, such as construction machinery or larger market signal may portend a longer or steeper recession in 2024 than currently forecast. Higher debt issuance and credit ratings downgradesNONRESIDENTIAL CONSTRUCTION capital investments, are likely to pull back more sharply than those will temporarily affect yields but are not a harbinger of steeper-than-anticipated recession.industries for which demand is relatively inelastic, such as food or medical. Industries which have government backing, such as THIS IS NOT WHAT A BANKING CRISIS LOOKS LIKE defense, semiconductors, infrastructure, and renewable energy, are RESIDENTIAL CONSTRUCTION also likely to fare relatively well during the upcoming downturn.In the wake of recent banking sector strife, including the collapse of Silicon Valley Bank, the downgrade to the US credit rating and subsequent downgrades to certain banks made headlines. Yet, the overall financial sector remains resilient, with a commercial and industrial loan charge-off We are beginning to see green shoots from the housing market. rate of just 0.25%. On the consumer side, auto loan delinquencies are near their five-year low, the credit card delinquency rate of 2.53% is below Since this industry leads the macroeconomy by roughly one year, the pre-COVID 10-year average, and the residential mortgage delinquency rate of 1.74% is the lowest in more than 16 years. recovery in the residential construction sector bodes well for recovery in the broader economy in late 2024. We continue to Make no mistake: A downturn is coming. US consumers are becoming more price conscious in the face of high inflation, and businesses are SteepMild Rise Flat MildSteepmonitor this and other leading indicators for signs of recovery and tightening their belts as corporate profits soften. However, the stable base of strong consumer and business finances will provide resiliency at Rise Decline Decline rise in late 2024 and beyond. the bottom of the cycle. The industrial economy will be in Phase D, Recession, by early 2024. As the economy traverses the back side of the business cycle, ominous headlines will mount. It will be increasingly crucial for business leaders to differentiate between new news and the reporting of data and events that develop in line with the outlook. You have prepared for the low of the business cycle; now stay the course. ITReconomics.com 2023 All Rights ReservedITReconomics.com 2023 All Rights Reserved12 www.mrca.orgMidwest Roofer'