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 OFFICIAL NFBA MAGAZINEJuly 2023 Published Monthly by ITR EconomicsThe 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.A Closer Look: The US EconomyAnnual average US Total Manufacturing Production in June was down 0.2% from the November 2022 level. Further, our ITR Leading Indicator, The Manufacturing Recession Is Herethe US ISM PMI (Purchasing Managers Index), and other leading indicators signal decline will likely persist in at least the coming quarters. What ERIC POSTdo manufacturers and manufacturing-adjacent firms need to know?What you need to know: Extra caution is warranted if you are tied to a durable goods segment that is interest-rate sensitive 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 pricingproverbial soft will be under The press and the Federal Reserve continue to debate whether the economy is likely to enter a recession this cycle or enjoy thelanding scenario. (Our data-driven forecasting methodology indicates that the US economy will indeed enter a recession.) Obscuduress in the coming quarters. The pain is most acute on the durables side of the manufacturing industry. The annual average USred by this willDurable Goods it or wont it recession debate is a fact that is, in our view, underreported: Manufacturing activity is already declining andWholesale Sales-to-Inventory Ratio is at a record low, with data history back to 1993. Nondurables, on the other hand, offer awill likely continue to relative respite, decline into 2024.with an annual average sales-to-inventory ratio right around the five-year average.ECONOMIC UPDATEAnnual average US Total Manufacturing Production in June was down 0.2% from the November 2022 level. Further, our ITR Leading Indicator, KNOW YOUR INDUSTRYS SENSITIVITY TO INTEREST RATESthe US ISM PMI (Purchasing Managers Index), and other leading indicators signal decline will likely persist in at least the coming quarters. What Affordability challenges are a huge part of this cycles recessionary trajectory. Price levels and activity surged with COVID-related fiscal and do manufacturers and manufacturing-adjacent firms need to know?monetary largesse. Now, the industries that benefited most from those trends have the greatest risk of pullback this cycle as the Fed raises rates WEand credit markets tighten. In many manufacturing markets, that pullback is already happening. Consider the data:AK 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 Historical data shows that manufacturing markets like metals, fabricated metals, machinery, and petroleum/coal productsmost ofwill be under chain loosening indicated by the Federal Reserves Global Supply Chain Pressure Index, this means that both volume and pricing which are durable goods, where it is sometimes possible to postpone or forgo purchase when interest rates are hightend to be v Durable Goods eryduress in the coming quarters. The pain is most acute on the durables side of the manufacturing industry. The annual average USinterest-rate sensitive.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, Chemicals, food, and papernotably all nondurable itemstend to be less interest-rate sensitive.e five-year average.with an annual average sales-to-inventory ratio right around thTransportation equipment and plastics fall somewhere in between.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 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 monetary largesse. Now, the industries that benefited most from those trends have the greatest risk of pullback this cycle as the Fed raises rates (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 and credit markets tighten. In many manufacturing markets, that pullback is already happening. Consider the data:fully show up until 2024. MANUFAHistorical data shows that manufacturing markets like metals, fabricated metals, machinery, and petroleum/coal productsmost ofCTURING 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. Sevenwhich are durable goods, where it is sometimes possible to postpone or forgo purchase when interest rates are hightend to be v of the eight erymanufacturing recessions are associated with yield curve inversions and macroeconomic recessions. The exception is the 2015-16 oil and gas interest-rate sensitive.Chemicals, food, and papernotably all nondurable itemstend to be less interest-rate sensitive.nflationary pressures that kept consumer spending relatively strong and GDP out driven recession, which coincided with low interest rates and iof recession. We do not enjoy those same advantages today.Transportation equipment and plastics fall somewhere in between.The data signals that a macroeconomic recession is highly probable. Media chatter of a soft landing should not keep you from prit takes a long time eparing for a Another fact that has been underplayed in the press is that interest rates have a very long lead time to the economy; that is, mild 2024 recession.(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.ITReconomics.com 2023 All Rights Reserved 4ITReconomics.com 2023 All Rights Reserved 432 / FRAME BUILDER - AUG2023'