Weekly Economic Trends and Indicators
The Headline:
The Federal Reserve reported that industrial production in the United States rose 0.1% in December, beating estimates of a 0.1% decline. Capacity utilization was unchanged at 78.6%
The Details:
Over the course of 2023, industrial production rose by 1%, although it was down in the last five months of the year, mostly pulled down by a 0.8% decline in October. Performance was very uneven across industries over the year as well. The materials category posted the greatest gains with energy up 3.2% over the year. Chemicals were up 9.1%, with consumer and equipment parts both up over 3%. Durable goods did better than nondurables with automotive products and home electronics gaining the most. Clothing production was down over 13% for the year.
The Context:
Despite the decline in overall industrial production over the last few months, many sectors remain quite strong. Consumer spending is still strong (much stronger than many expected it would be a year ago), and this has kept demand high for many types of manufactured goods.
As expectations were for a decline in industrial production rather than an increase, we once again have surprising incoming data to the upside. This is a familiar refrain, as the economic data repeatedly came in better than expected last year. The question is whether the Federal Reserve can begin cutting interest rates while the economy shows few signs of slowing down.
In an interview with CNBC Friday morning, Austan Goolsbee, president of the Chicago Fed, reiterated that the Fed is “data dependent” and that more progress needs to be made on housing inflation. As we have discussed previously, there are multiple reasons for expecting the Fed to follow through with rate cuts at some point in 2024. Real rates are becoming more restrictive as inflation falls. Much of the remaining inflation is in shelter and other sectors that are subject to forces other than interest rate policy.
However, the market may have gotten a little ahead of itself when expecting rate cuts so soon. On balance, the news of the week clearly had a corrective effect on market expectations. On Friday afternoon, CME FedWatch Tool indicated that the probability of a rate cut in March is down to 47%, down from 81% on January 12. “Higher for longer” is back in vogue. The “soft landing” we have been expecting is not really a landing at all, at least not yet. All of this means that manufacturing will have to contend with higher interest rates well into this year. For industries with high demand (tech, motor vehicles, equipment), this is less of a problem, but for industries for which demand fell in 2023, relief is somewhat further away.
Next week: 4th Quarter U.S. GDP
