U.S. Total Industrial Production Forecast Revision

BY BRIAN BEAULIEU

the Fed didn’t need to push interest rates as high as it has (with more rise coming).

Of course, it is entirely possible for the Fed to knowingly raise interest rates “too” high and “too” fast because it intends to not only bring inflation down but alter the forces that gave rise to the inflation. Baby boomers and students of history will remember Paul Volcker’s quest to rid our economy of inflation. Raising interest rates too high and too fast creates altered behaviors and unpleasant consequences for the economy. That is the state we find ourselves in today.

The adversity foretold by the inverse yield curve is not immediate. Historically, it takes a median of 14 months for the U.S. Total Industrial Production 12MMA data trend to reach a peak following the onset of the inversion. In this case, the inversion appeared in October 2022. Add 14 months and you get the typical timing input of December 2023 for when the U.S. Total Industrial Production 12MMA data trend will peak. We are projecting a September 2023 12MMA data trend high. It is worth noting that the timing input is quite variable, with 5 to 18 months being normal.

In effect, the occurrence of the inverse yield curve caused us to bring in the timing of our previously projected mid-decade recession. That recession was expected based on higher inflation and higher interest rates. Those higher numbers are here much quicker than is normal (the Fed is not following its “normal” playbook). With the inflation and higher interest rates now at our doorstep, we are projecting the U.S. Total Industrial Production 12MMA will peak in September 2023. The timing is early relative to the median input of December 2023 cited above. We think the earlier-than-median timing is warranted by the incredible spread between the short- and long-term yields and the lack of any viable upside leading indicator signals for the U.S. economy.

Our revised forecast calls for U.S.

Inverse Yield Curve in Place: Business Cycle Decline Ahead

Total Industrial Production in 2023 to come in 0.4% below our prior forecast, which was prepared with data through June 2021. Industrial activity for 2023 as a whole is forecasted to be essentially flat with 2022.

The more significant change is in our 2024 outlook. Rather than the 12MMA rising, as we were previously projecting, we now have the 12MMA declining throughout 2024. As a result, 2024 is now expected to come in approximately 5.5% lower than we previously forecasted.

We are not building in a severe U.S. Total Industrial Production recession for 2024 for the following reasons:

◼ Manufacturing should be somewhat supported (downturn mitigated) by the shortening of the supply chains (nationalism).

◼ Consumer balance sheets are still in good shape, although real income growth (excluding transfer payments) has slowed significantly.

◼ Corporate profitability is holding up.

◼ Federal legislation that has already been signed into law will drive construction and future production.

The extended forecast now has 2025 as a recovery year, characterized by rateof-change and 12MMA data trend rise.

2025 is forecasted to come in 2.7% higher than 2024. The forecast through 2025 is presented below.

We don’t take changing our baseline forecasts lightly. We are used to providing you with an earlier warning regarding the economy’s fundamental direction. The change in forecast is only four quarters out