ANALYSIS REPORT

U.S. Industrial Production Index Data Trend

from where we are today, uncomfortably close from our perspective. We apologize for the closeness of the change. We view the inverse yield curve occurrence as a function of a COVID-Echo. COVID-19 led to the incredible liquidity dump into the U.S. economy, which led to the inflation rate soaring (contrary to what Treasury Secretary Yellen may think), which belatedly led the Fed to raise short-term rates at an incredible pace. We had expected the Fed would not want to intentionally put the economy into recession. That turned out to be a faulty assumption.

HOW BAD WILL THE RECESSION FEEL?

The answer is highly subjective and will vary from one market to the next. The projected U.S. Total Industrial Production 12/12 rate-of-change low point, -2.6%, puts the trough in the neighborhood of the 1991, 2002, and 2016 cyclical lows. The projected magnitude of decline in the 12MMA is 2.7%. That puts the decline on par with the 1969−71, 1980−81, and 1990−91 recessions. We have no reason to suspect that we are looking at anything approaching Great Recession magnitude, assuming, among other things:

◼ The Fed ceases pushing up rates sometime March–May of 2023

◼ The Fed will be content with another 75–100 basis points of rise

◼ The job market stays strong enough to support ongoing real income growth (excluding transfer payments)

◼ Food prices moderate or come down

◼ The S&P 500 doesn’t deteriorate all the way to where the market is in equilibrium with the corporate profitability trend you may have seen from ITR presenters

◼ Our normal leading indicators begin to recover in late 2023 or early 2024

We think the assumptions cited above are valid, hence our forecast. They are listed here so you may know what potential trouble spots or warning signs we are watching for.

WHAT DO YOU DO NOW?

Of the company data streams we will examine in December, 41.7% have no demonstrable relationship with the inverse yield curve within a three-year period. Proper planning requires that we all know how susceptible our companies are to this condition. Lack of correlation likely means a greater ability to navigate the turbulent waters ahead.

For 54.2% of our December client series, there is not a clear relationship to U.S. Total Industrial Production recessions. It could mean growth for the company slows but does not have to break downward.

Knowing the relationships is something we will stress with our clients over the coming quarter, so that you may be as prepared as possible for what is likely to occur a year from now.

Leading Indicators

ITR LEADING INDICATOR™

INDICATOR DECLINES, SIGNALING FURTHER DECLINE FOR U.S. INDUSTRIAL SECTOR

The ITR Leading Indicator™ declined in November. Indicator decline suggests waning business cycle momentum in U.S. Industrial Production will extend into at least the second half of 2023.

ITR Leading Indicator™

TOTAL INDUSTRY CAPACITY UTILIZATION RATE

RATE 1/12 TICKS DOWN; TREND SIGNALS INDUSTRIAL PRODUCTION WILL REMAIN ON BACK SIDE OF BUSINESS CYCLE INTO AT LEAST MID-2023

The U.S. Total Industry Capacity Utilization Rate 1/12 moved lower in November. The 1/12’s general declining trend suggests that U.S. Industrial Production will remain on the back side of the business cycle into at least mid-2023.

THE OECD U.S. LEADING INDICATOR

INDICATOR 1/12 MOVES LOWER, SUGGESTS 12/12 DECLINE FOR INDUSTRIAL SECTOR INTO AT LEAST 3Q23

The U.S. OECD Leading Indicator 1/12 rate-of-change declined in October. Indicator 1/12 decline portends waning business cycle momentum for U.S. Industrial Production into at least the third quarter of 2023.

U.S. ISM PMI (PURCHASING MANAGERS INDEX)

PMI 1/12 DECLINES; INDUSTRIAL SECTOR WILL LIKELY BE ON THE BACK SIDE OF BUSINESS CYCLE INTO AT LEAST LATE 2023

The U.S. ISM PMI (Purchasing Managers Index) 1/12 rate-of-change moved lower in November. PMI 1/12 descent signals waning business cycle momentum for U.S. Industrial Production is likely to persist into at least late 2023.