b'July 2023 Published Monthly by ITR EconomicsA Closer Look: The US EconomyThe Manufacturing Recession Is HereERIC POSTWhat you need to know: Extra caution is warranted if you are tied to a durable goods segment that is interest-rate sensitive The press and the Federal Reserve continue to debate whether the economy is likely to enter a recession this cycle or enjoy the proverbial soft landing scenario. (Our data-driven forecasting methodology indicates that the US economy will indeed enter a recession.) Obscured by this will it or wont it recession debate is a fact that is, in our view, underreported: Manufacturing activity is already declining and will likely continue to decline into 2024.Annual average US Total Manufacturing Production in June was down 0.2% from the November 2022 level. Further, our ITR Leading Indicator, the US ISM PMI (Purchasing Managers Index), and other leading indicators signal decline will likely persist in at least the coming quarters. What do manufacturers and manufacturing-adjacent firms need to know?WEAK ORDERS, SUPPLY CHAIN LOOSENING, AND WEAKNESS IN DURABLES SIGNAL PRICE AND VOLUME STRUGGLESAnnual US Total Manufacturing New Orders ticked down slightly in April and May, coming off a record-high March. Coupled with the supply chain loosening indicated by the Federal Reserves Global Supply Chain Pressure Index, this means that both volume and pricing will be under duress in the coming quarters. The pain is most acute on the durables side of the manufacturing industry. The annual average US Durable Goods Wholesale Sales-to-Inventory Ratio is at a record low, with data history back to 1993. Nondurables, on the other hand, offer a relative respite, with an annual average sales-to-inventory ratio right around the five-year average.KNOW YOUR INDUSTRYS SENSITIVITY TO INTEREST RATESAffordability challenges are a huge part of this cycles recessionary trajectory. Price levels and activity surged with COVID-related fiscal and monetary largesse. Now, the industries that benefited most from those trends have the greatest risk of pullback this cycle as the Fed raises rates and credit markets tighten. In many manufacturing markets, that pullback is already happening. Consider the data:Historical data shows that manufacturing markets like metals, fabricated metals, machinery, and petroleum/coal productsmost ofwhich are durable goods, where it is sometimes possible to postpone or forgo purchase when interest rates are hightend to be veryinterest-rate sensitive.Chemicals, food, and papernotably all nondurable itemstend to be less interest-rate sensitive.Transportation equipment and plastics fall somewhere in between.Another fact that has been underplayed in the press is that interest rates have a very long lead time to the economy; that is, it takes a long time (around two years) for interest rate changes to be fully reflected in the economy. The effects of the interest rate hikes of 2022, therefore, will not fully show up until 2024. MANUFACTURING RECESSIONS, INVERTED YIELD CURVES, AND MACROECONOMIC RECESSIONS GO TOGETHERThere have been eight prior recessions in manufacturing activity in the data history, which goes back to the early 1970s. Seven of the eight manufacturing recessions are associated with yield curve inversions and macroeconomic recessions. The exception is the 2015-16 oil and gas driven recession, which coincided with low interest rates and inflationary pressures that kept consumer spending relatively strong and GDP out of recession. We do not enjoy those same advantages today.The data signals that a macroeconomic recession is highly probable. Media chatter of a soft landing should not keep you from preparing for a mild 2024 recession.YOUR TOOLKIT FOR BUILDING EXCELLENCEJuly 2023 Published Monthly by ITR EconomicsITReconomics.com 2023 All Rights Reserved 4Industry AnalysisRETAIL SALES WHOLESALE TRADE US Total Retail Sales in the 12 months throughAnnual US Total Wholesale Trade came to $8.0June totaled $8.2 billion, up 5.7% from last year trillion in May, declining from a February peak Consumers are relying more on credit to fundThe ITR Checking Points system suggestspurchases than this time last year; quarterly decline will persist in the coming quartersTotal Household Credit Card Debt rose 17.2% inthe first quarter of 2023Waning demand and downward momentum Leading indicators suggest Retail Sales will peak in commodity prices will contribute to a hardaround the end of this year; decline will follow landing for Wholesale Trade this cyclein 2024AUTO PRODUCTION MANUFACTURING Annual North America Light Vehicle ProductionUS Total Manufacturing Production in the 12totaled 15.0 million in May, up 14.6% from the months through June was up 0.8% from the year-year-ago level ago level Supply chains are improving, which isGlobal Supply Chain Pressure Index trends andcontributing to current Production rise slowing macroeconomic demand indicate that However, high interest rates and a softening manufacturing is likely to stay on the back sidemacroeconomy are likely to negatively impact of the business cycle in the near termdemand; Production decline is likely in 2024Expect mild decline in Production to persist intoat least 2024ROTARY RIG CAPITAL GOODS NEW ORDERS The US Rotary Rig Count averaged 759 in the 12Annual US Nondefense Capital Goods Newmonths through May, up 31.3% from the year- Orders (excluding aircraft) were up 4.2% fromago level one year ago The US Oil and Gas Extraction Utilization RateDeclining Domestic Corporate Profits andcame to 99.6% in June elevated interest rates are likely to hinder some As we move further along the back side of the business-to-business spendingbusiness cycle, weakening industrial demand isDeflation in Producer Prices will be an additionalgenerating downside pressure on the Rig Count downside pressure on dollar-denominated NewOrders into 2024TOTAL NONRESIDENTIAL CONSTRUCTION TOTAL RESIDENTIAL CONSTRUCTION Annual US Total Nonresidential ConstructionAnnual US Total Residential Construction camein the 12 months through May totaled $979.6 in at $890.3 billion in May, declining from a late-billion, up 13.4% from last year 2022 peak Banks are tightening their lending standards forLow vacancy rates, along with record-highcommercial real estate, which will put downward employment and income levels, suggest pent-uppressure on future Construction projects demand We expect Construction spending to decline inSpending decline in Residential Construction is2024 likely to extend into 2024ITReconomics.com 2023 All Rights Reserved 3 FRAME BUILDER - AUG023 / 31'