THE GAWDA INDUSTRY ANALYSIS REPORT Provided

by ITR Economics™

The OECD U.S. Leading Indicator

GAWDA EXECUTIVE SUMMARY/DASHBOARD

Producer Prices are still elevated relative to one year ago, but the monthly and quarterly trends are tentatively declining.

the Prices 3MMA to decline into at least the third quarter of 2023, falling below $75 in the latter half of that year.

The New Orders 12MMT will rise into the second half of 2023,

The will plateau in the mid-$400 billion range throughout 2023, then decline into late 2024

The 12MMT has reached record highs for 13 consecutive months, though it is slowing in its pace of rise.

Decline in the ITR Leading Indicator™ signals cyclical decline for the US industrial sector will persist into at least the second half of 2023.

Note: Forecast color represents what Phase the market will be in at the end of the year.

Given rapid rise in interest rates via the Federal Reserve, as well as a sustained inversion of the yield curve and decline in leading indicators, we have determined that a more severe and longer economic downturn than otherwise would have occurred is likely. We have changed many of our forecasts as a result. We now anticipate that an industrial sector recession we had previously projected for further into the decade will occur in 2024, following a relatively flat 2023. On the whole, the recession will be mild given the financial strength of the consumer and businesses, as well as sizable backlogs, easing supply chain shortages, and nearshoring activity. Producer-side pricing pressures are easing, which may allow for margin repair for those whose prices tend to be stickier. U.S. Processed Goods for Intermediate Demand

Producer Prices on both a quarterly and monthly basis have ticked down in recent months.

U.S. INDUSTRIAL PRODUCTION

* Index based to 2017 = 100.

HIGHLIGHTS:

◼ We revised the Production outlook given the inverted yield curve and leading indicator signals; the primary change was to 2024

◼ The 12MMA will rise into the latter half of 2023, then decline through 2024

◼ Production will enter Phase D, Recession, in 2024

Our analysis suggests that the Federal Reserve’s actions and certain COVID-echoes have pulled forward a contractionary cycle that we had originally pegged for later in the decade. Given the sustained inversion between the 10-year Treasury yield and 3-month Treasury yield, as well as ongoing decline in leading indicators, we revised our U.S. Industrial Production outlook.

We now expect the Production 12MMA to peak in the latter half of 2023; that year will come in essentially flat with 2022. Production 12MMA decline will extend from late 2023 through 2024. We are forecasting that the magnitude of decline will be milder than is historically typical due to the ongoing infusion of foreign direct investment into the U.S. as supply chains shorten and sourcing from China grows less appealing. Overall, our 2023 expectations for the Production 12MMA have changed little relative to our prior outlook; we lowered our 2024 expectations by 5.5%.

Management Note: The back side of the business cycle can be stressful. Channel your fears into your preparations for the future and ask yourself what opportunities the low point of this cycle could bring.

U.S. NONDEFENSE CAPITAL GOODS NEW ORDERS (EXCLUDING AIRCRAFT)

SLOWER GROWTH

2022 8.4% $887.4 billion

2023 1.8% $903.4 billion

2024 -4.6% $861.8 billion

HIGHLIGHTS:

◼ We revised the New Orders forecast given the Federal Reserve’s actions and the inverted yield curve

◼ The 2023 12MMT is little-changed; 2024 was lowered by 11.6%

◼ We now anticipate Phase D, Recession, for New Orders in 2024

We are not seeing the early signs of recovery that we would want to see at this juncture – leading indicators are still descending. Further, the bond market is signaling that the Federal Reserve has gone too far in raising interest rates in its attempt to restore price stability. This signal comes in the form of the sustained inversion of the yield curve, which is a high-probability input suggesting an upcoming – but not immediate – contraction.

We revised the forecast for U.S. Nondefense Capital Goods New Orders (excluding aircraft) accordingly. The New Orders 12MMT will peak around the third quarter of 2023, but our outlook for that year as a whole has changed little. Subsequent 12MMT decline will extend through 2024; we lowered our 2024 12MMT outlook by 11.6% relative to the prior forecast.

The New Orders 12/12 will decline through 2024, crossing into Phase D, Recession, early that year, alongside the U.S. industrial sector. The recession will be relatively mild by recent historical standards, as backlogs and onshoring trends will provide some buffer for U.S. business-to-business spending.

Management Note: Remember that high interest rates are not necessarily a reason to halt investments. Investments that will improve your efficiencies or reduce your dependence on labor may prove worthwhile.

U.S. CRUDE OIL SPOT PRICES

U.S. Crude Oil Spot Prices Data Trend

U.S. Crude Oil Spot Prices Data Trend

SLOWER GROWTH

Dec 2022 $82.60 per barrel

Mar 2023 $80.58 per barrel

Jun 2023 $76.62 per barrel

Sep 2023 $73.08 per barrel

HIGHLIGHTS:

◼ We lowered the forecast

◼ The Prices 3MMA will decline into at least the third quarter of 2023

◼ The decline is a function of rising supply and softening demand

U.S. Crude Oil Spot Prices declined in November, averaging $84.37 per barrel for the month. With the yield curve inversion intensifying, adding to recession worries, daily Prices have declined sharply on demand concerns. Meanwhile, leading indicator input has been nearly uniformly negative. These demand concerns led us to lower the forecast.

Expect the Prices 3MMA to decline into at least the third quarter of 2023, falling below $75 in the latter half of that year. Note that this is a three-month moving average – daily Prices can and will vacillate around this downward trajectory.

Decline in Prices may be attributed in part to a reversal of the prior supply-demand dynamic. In recent months, the World Oil Gap trend has gone negative (with supply exceeding demand) amid the convergence of supply increases and softening global demand.

Management Note: Lower oil prices mean some relief in freight costs ahead – a boon to many businesses. However, freight companies will likely be squeezed by softening demand in the coming year.

Prices Rate-of-Change

U.S. STEEL SCRAP PRODUCER PRICE INDEX

U.S. Steel Scrap Futures Commodity Prices Data Trend

$/GT U.S. Steel Scrap Futures Commodity Prices

SLOWER GROWTH

Dec 2022 496.57*

Mar 2023 500.65*

Jun 2023 488.30*

Sep 2023 540.76*

* Index based to 1982 = 100.

HIGHLIGHTS:

◼ Steel Scrap Prices ticked down further in October and November

◼ We lowered the forecast, factoring in our new U.S. Industrial Production outlook

◼ General Prices 3MMA decline will extend into at least the third quarter of 2023 October and November brought further decline for monthly U.S. Steel Scrap Producer Prices, which in November were down 42% from the April 2022 record high and 27% below the year-ago level. The latest Prices data came in lower than anticipated. To account for this and a downward revision to our U.S. Industrial Production outlook – precipitated by a sustained inversion in the 10-year to 3-month Treasury yield curve – we downgraded the Prices outlook.

We expect the Prices 3MMA will generally decline into at least the third quarter of 2023, with that quarter coming in 12% below the current level. Economies around the world are decelerating, leading to softer demand. Meanwhile, the supply of steel scrap stemming from the auto industry may be finally coming online. These factors support our outlook that Prices will normalize into at least the second half of next year.

Management Note: If you use steel scrap as an input, avoid long-term contracts that lock in current prices, as we expect steel costs will decline as we move through 2023.