b'YOUR TOOLKIT FOR BUILDING EXCELLENCEMacroeconomic OutlookMay 2023 Industry Snapshots The majority of leading indicators that we trackincluding the ITR Leading Indicator, the US ISM PMI (Purchasing Managers Index), Published by ITR Economics Arrow denotes 12-month moving total/average direction. and the US Total Industry Capacity Utilization Ratesignal that Industry Analysis many sectors of the US economy will continue to trend on the back side of the business cycle. These sectors include US Industrial RETAIL SALES WHOLESALE TRADEProduction, US Total Retail Sales, and US business-to-business (B2B)US Total Retail Sales in the 12 months through spending. Our analysis of the inverted 10-year to 3-month Treasury RETAIL SALESAnnual US Total Wholesale Trade has flattenedApril were at $8.2 trillion, up 7.1% from the same in recent months but is up 9.7% from one year tors yield curve, which reaches further out, suggests that these secperiod last year agowill reach cyclical lows around late 2024. The magnitude of theThe annual average inventory-to-sales ratio for Decline in inflation-adjusted savings levels, cyclical downturn will differ by sector, but it will be generally mild decline in the ITR Retail Sales Leading wholesalers is rising at the fastest pace in moreWHOLESALE TRADE relative to historical trends.Indicator, and elevated long-term interest rates than 13 years; be careful of excess inventorypoint to softer consumer spending ahead piling upRising interest rates, alongside economic uncertainty, are hinderingTrends in the US ISM PMI (Purchasing Managers We expect mild rise in Retail Sales this year some firms capex investments. This will contribute to ongoing Index) and the ITR Leading Indicator point torelative to 2022, followed by mild decline moving slowing growth and eventual contraction in B2B spending. We AUTO PRODUCTION further growth rate decline for Wholesale Tradeinto 2024 expect annual US Nondefense Capital Goods New Orders (excluding in the coming quartersAUTO PRODUCTION aircraft), a measure of B2B spending, to peak in mid-2023 and then MANUFACTURINGdeclineapproximately 5% altogetherthrough the end of 2024. MANUFACTURING Annual North America Light Vehicle ProductionUS Total Manufacturing Production in the 12totaled 14.6 million units in March, the highest in months through April is flattening, though upAnnual US Total Manufacturing Production, which accounts for nearly three years 1.4% from one year earlieralmost 80% of US Industrial Production, has edged downwardSupply chain improvement is allowingElevated interest rates and softening demandin two of the last three months, and we expect decline to be the ROTARY RIG for goods will generate headwinds forProduction to catch up with pent-up demand,overarching trend into the latter half of 2024. By contrast, overall but growing economic uncertainty and high Production this year and into 2024interest rates will deter some consumers from Industrial Production, which is benefiting from mining activity, isAs a result, decline for annual Production ispurchasing vehicles hovering around record-high levels. Annual Industrial Production likely to develop during the second half of theCAPITAL GOODS will peak in the latter half of this year and then declineaboutProduction will transition to the back side of the yearbusiness cycle later this year as a result 2.7% in allinto the end of 2024. Industrial sector decline will be cushioned by elevated backlogs and near-term reshoring trends.ROTARY RIG CAPITAL GOODS NEW ORDERSNONRESIDENTIAL CONSTRUCTION We expect annual US Total Retail Sales to peak around the end ofThe US Rotary Rig Count averaged 758 rigs inAnnual US Nondefense Capital Goods Newthe 12 months through April, up 36.3% from last Orders were up 4.8% in March; growth is slowingthis year, then decline, about 1% or less, into the latter half of 2024.Elevated borrowing costs, coupled withyear as growth slows Consumer financials are stable, with credit delinquencies below theOil price trends suggest that Rig Count growth weakening economic data and declining2019 level and US Real Personal Income (excluding current transfer RESIDENTIAL CONSTRUCTION business confidence, portend furtherwill continue to slow into at least late 2023 receipts) at record highs. However, savings are not keeping pace deceleration and then mild decline in thewith inflation; we are monitoring this downside risk to the outlook. OPEC+ announced oil production cuts in April, quarters aheadwhich could leave room for US producers to take Rising interest rates, alongside economic uncertainty, areThis industrial sector recession will be notablymarket share milder than the Great Recession thanks tohindering some firms capex investments.reshoring activity, solid (though deteriorating)SteepMild Rise Flat MildSteepconsumer fundamentals, and other factorsRise Decline Decline Our outlook for relatively mild macroeconomic, industrial, and TOTAL NONRESIDENTIAL CONSTRUCTION TOTAL RESIDENTIAL CONSTRUCTIONretail sales downturns in 2024 assumes that the inversion of theAnnual US Total Nonresidential ConstructionAnnual US Total Residential Construction was atyield curve will not extend beyond this year. Recent comments by was at $922.8 billion in March, up 11.8% from $892.7 billion in March; Construction is decliningFederal Reserve Chair Jerome Powell suggest that the Fed could last year from a November 2022 peakmaintain a hawkish stance for longer than originally expected,Trends in US Commercial and Industrial Sector which could jeopardize that assumption. If so, the economy would Architecture Billings suggest that ConstructionAffordability challenges are likely to weigh onface higher hurdles, which could result in more severe or longer-growth will begin to slow in late 2023 Residential Construction in the coming quarterslasting downturns than we are currently forecasting. We areGiven the typical lead time, growth will generallyTight housing inventories suggest that theclosely monitoring the Feds actions and the potential risks to our slow in 2024with decline developing late in the forecasts. housing market will avoid a Great Recessionyearas the softening macroeconomy of 2023 scenario this cyclehinders ConstructionITReconomics.com 2023 All Rights Reserved 3ITReconomics.com 2023 All Rights Reserved FRAME BUILDER - MAY2023 / 35'