March 4, 2024

Hi everyone. Welcome to TrendsTalk. I’m your host Taylor St. Germain. Thanks for joining us on this episode. As you know, we at ITR Economics are your unbiased and apolitical source of economic intelligence. And today I wanted to discuss GDP. It’s the highest-level dataset here in the US that we discuss, and it’s gaining a lot of attention over the last few months in the media, especially the strong performance in GDP. And what I wanted to discuss here today is the upgrade that we made to our GDP outlook. This was a mild revision to GDP, but it’s an upgrade, which is good news of course, and I wanted to share what that new forecast looks like, why there is an upgrade, but also some really important reminders as it relates to thinking about GDP versus the industrial economy and how some of those perspectives may differ.

So first, let’s start with the GDP upgrade. We forecast the three-month moving average, the three 12 rate of change. The reason we’re focused on the 3MMA or the three 12 rate of change is because the GDP data comes to us quarterly. And when we look at that three-month moving average, we revise 2024 up by about 3.3%, ’25 up by about 2.4% and 2026 up by about 2.7%. So again, we’re not talking about some seismic revision here. It’s a very mild, low single-digit upgrade, but it’s good news nonetheless. When we look at the rate of change, we expect that GDP in the fourth quarter of ’24 compared to the fourth quarter of ’23, will now be up 1.1%, the fourth quarter of ’25, compared to the fourth quarter of ’24 up 1.5% and the fourth quarter of ’26 compared to the fourth quarter of ’25 up 1.9%.

So those year-end growth rates for the next three years, ’24 up, 1.1%, ’25 up, 1.5%, and ’26 up 1.9%. Now, the reason for the upgrade to the GDP forecast, or I should say reasons for the upgrade to the GDP forecast, it’s a confluence of factors that are leading to this mild rise in 2024. And this is despite the downside pressure that we’re still seeing from the interest rate trends.

The first one that’s very important is corporate cash. Corporate cash remains high, and that is certainly helping some of the businesses out there, industries out there avoid some of the pain that would’ve likely been felt otherwise when considering where interest rates are trending. So again, it sort of varies depending on industry, but many industries experiencing record-high corporate cash numbers, and for those industries that aren’t in the record-high territory, still elevated corporate cash perspectives. And again, that’s a mitigating factor to this still high interest rate environment that we’re dealing with here today.

On our last episode, we talked about employment. That employment market remains relatively tight. I talked about our private sector employment upgrade and that upgrade to the private sector employment forecast in this relatively tight labor market, that’s going to keep wages from falling at what we would suggest is a normal recessionary rate. That is really important as it relates to the consumer in particular, that wages staying elevated or remaining elevated, maybe a better way to put it, that’s helping the consumer spending portion of GDP. The consumer is the overwhelming force that drives GDP in terms of the GDP makeup. So very important trend to be watching there.

And then additionally, when we look at the government spending aspect of GDP, it was very strong. It was what we’d call stronger than normal or an above-median trend in terms of the strength in government spending. And that’s going to create what we’d call an abnormal lift because again, slightly abnormal trend given the pace of this government spending. And that will help GDP particularly in the first half of ’24. So to summarize some of these factors, it’s corporate cash, it’s wages supporting consumer strength and its additional government spending.

Now, that’s not to say that there still aren’t some risks out there. And, of course, we at ITR are always transparent about not just the supporting evidence but the risk behind the forecast. Now, as I had mentioned, the consumer is holding up well as we sit here today, but if we do see a bit of a consumer pullback, especially due to the higher prices and borrowing costs, that could create some downside pressure in GDP.

Again, it’s in our risk category because we see the consumer holding up quite well, but it’s something to be thinking about as a potential downside risk to the forecast. Some other concerns out there is of course, the Federal Reserve and their respective interest rate policy, as well as some of the geopolitical pressures that we’re seeing around the world, several conflicts around the world, whether we’re continuing to monitor Russia-Ukraine, or the situation in the Middle East. And those are risks to the forecast. Those are outside forces that can certainly cause alterations in what we’d suggest as a normal business cycle.

So just keep those things in mind. Again, the supporting evidence outweighs the risks. That’s why we made the changes to our forecast. But it’s something to think about. I wanted to end here with just a reminder, and for those of you that engage with ITR, know ITR, this is not news to you, but it’s an important thing to bring up. The industrial economy is still poised for some negative growth rates in ’24. So even though we’ve seen this upgrade to GDP, the industrial economy is still feeling some of the weakness. Actually, as we sit here today. The three 12 rate of change for US industrial production is actually already in that negative territory.

And there’s a really interesting relationship that I’ve been highlighting for a lot of our clients and the folks I’ve been talking to when I’m traveling, which is that if you look at the service sector of GDP and compare it to the industrial economy, you can see there’s two very different trends, two very different stories going on when you look at the data, being that the service side of GDP, which, of course, is impacted by that relatively strong consumer that we’ve been talking about, is showing meaningful rise. But when we look at industrial activity in terms of US industrial production, particularly the 12-month moving average, we can see that stagnation that’s happening that slow down, and we still have that mild contraction projected for 2024.

Now, the majority of the clients that we work with have a much better correlation to the industrial economy than to GDP, and that’s because of the application of industrial production, right? It’s focusing on manufacturing, mining and utilities, including oil and gas. So the application to the business that we’re doing every day, especially in the industrial manufacturing sector, a much greater application, a higher correlation for the majority of the clients we work with. So even though we’ve made this GDP upgrade as a result of some of the strength we’ve seen in the service sector and some of the other points that I’ve made, that doesn’t mean that we’re not immune to some negative year-over-year, quarter-over-quarter growth rates if you’re participating primarily in the industrial economy.

So our US industrial production forecast has not changed despite this GDP upgrade, which is why it’s so important to understand which leading indicators that you correlate to, and we can certainly help you out with that if that’s an exercise that you haven’t already done.

So overall, more strength from the … I would say, resilient strength from the consumer. We’re seeing a mild upgrade to our GDP outlook in ’24, ’25, and ’26, which is all good news, but still no change in that industrial outlook where we’re still seeing some weakness out there.

I hope you found this information helpful. Thanks so much for joining me here today on this episode. Please like and subscribe to the podcast wherever you listen to your podcast, and I’m looking forward to seeing you all on the next one.