Chris Kuehl
Managing Director • Armada
Some Updates From the Watch
As many of you are aware, Armada produces a monthly tome we call The Watch. I know that for the ever-alert NACM Connect reader this is their definitive guide to the economic world as NOBOBY is as reliable as the Armada bunch. No kidding, we have a track record of over 96% accuracy on our assessments from month to month and quarter to quarter. Much of this piece comes from The Watch (if you want the whole thing, graphs and all – send me an e-mail at chris.kuehl@armadaci.com.
As many of you are aware, Armada produces a monthly tome we call The Watch. I know that for the ever-alert NACM Connect reader this is their definitive guide to the economic world as NOBOBY is as reliable as the Armada bunch. No kidding, we have a track record of over 96% accuracy on our assessments from month to month and quarter to quarter. Much of this piece comes from The Watch (if you want the whole thing, graphs and all – send me an e-mail at chris.kuehl@armadaci.com.
Macroeconomic Overview
The latest estimate of Q3 GDP remains above 2.0%. The GDPNow data has been pretty stable of late with estimates that range between 2.0% and almost 3.0%. The same factors have been driving interest as has been the case most of the year. The upper third of consumers remain active and the lower third of consumers have been checked out for most of the last two years. The middle third is hanging in there as long as they perceive they have job stability.
The mini-market crisis came and went and mostly reflected the fact that too few really understand the labor market or the yen carry trade. The latest jobs data was not good but it was far from awful. The major concern now shifts to whether the retail sector maintains its pace. Q3 still looks promising and is still being pulled by the upper third of income earners. Thus far the market gyrations have not been having much of an impact on GDP growth.
The Armada models (covering more than 85% of GDP), still show a low recession risk. Concerns are building as far as in consumer spend but mostly as regards to those in the lower third of income earners. The market fall shook up the upper third for a while but that crisis passed and overall confidence seemed to rebound quickly.
Disposable income continued to grow just a bit but the percentage change has been weak (with just a very slight uptick lately). The expectation going forward is for continued growth through most of 2024 at just 1.4%. Inflation-adjusted income has returned to the long-term trend dating back to the 1990’s. The most closely watched factors as far as disposable income will be inflation (which has calmed a bit) and the potential for some major tax changes. The majority of that alteration would be seen with the higher income earners and that could have a major impact on their spending expectations – affecting everything from retail to housing.
The New York Fed’s Spending Expectations over the next six months still trends down from the peaks reached in the post lockdown period. They remain just below the long-term trend for expectations but historically they are still high. This data is always volatile as consumers are always volatile. It doesn’t take much to make people nervous and that is more evident in election years. Thus far there have not been major worries over employment – at least as far as layoffs and this is what traditionally spooks the consumer.
Retail Sales Data
The retail sales outlook models show that retail spending is forecasted to continue leveling off after that major boost of growth in the summer. What is most interesting is that even the lower set of expectations would show growth and if the higher expectations are met this year, the numbers continue to surge.
For 2024, the retail sales forecast from the National Retail Federation shows overall growth between 2.5% and 3.5%. Last year the growth was 3.6%. The long-term curve shows retail sales remaining in a strong historical range throughout 2024. The flattening that manifests towards the end of this year and into 2025 reflects the less stable job market (for the middle third of consumers) and threats of weaker market performance and potentially higher taxes (for the upper third).
Job openings remain high at 7.6 million in the latest data from the BLS but that is down from last month. The job market is strong but shows signs of cooling. Some broad measures of unemployment are inching up. The U-6 rate had been increasing but has recently started to rise again (from 7.8% to 7.9%). The U-3 rate fell slightly to 4.2% and job growth has essentially stalled. Wage growth remains at 4.7% (down from 6.7% in June of 2022). Overall inflation has fallen to 2.9% and that is the lowest level of growth since March of 2021.
The Fed’s inflation goal is still 2.0% so there remains some room for the Fed to hold interest rates steady.
The Upper Leg of the “K” Recovery – Relevant – We have made much of the “K” recovery that separates the lower third (under $50,000), middle third ($50,000 to $100,000) and the upper third (over $100,000). The focus has been on that lower third as they have been hit hardest by inflation but it has been the upper third that has been carrying the economy. They are now starting to see more concerning signals from a nervous market, potential tax hikes and even a potentially weaker dollar as the interest rates come down. This group has been the engine and the economy would stall without their contributions.
Retail Season in Full Swing – Relevant – This is the make-or-break time of year for retail but also for all the sectors that support retail or are supported. Consumption is over 80% of the US GDP and much of that buying takes place in the fourth quarter. Two things have altered the usual pattern for retailers and that creates some unease. Both have to do with the supply chain. The Red Sea mess forced container ships to add days to their voyages and that created a shortage. This forced shippers to bring the shipping season forward and then they started to react to the potential strikes that could virtually shut down the ports on the US east and Gulf coast. Another motivation to bring shipping season early. Now retailers are stuck with their earlier decisions. They will either have too much inventory if the consumer is cautious or they will be inventory short and will end up leaving too much money on the table. They also worry about the potential for a deterioration of demand from the upper third of income earners.
Manufacturing Update
The outlook for overall US Industrial Production in Manufacturing (IPMAN) includes both durable and non-durable goods. This month’s model continued to show near term growth and strength through November before decelerating fairly slowly into Q1 and Q2 of next year. The model is still showing full-year 2024 expanding by 2.6% (little change from last month). This view strips out the utilities and mining portion of industrial production and focuses solely on manufacturing activity.
These models are updated monthly and they now show slight improvement through 2024 before tapering off again in 2025. The “cone of variability” and the models are seeing some scenarios that would push the forecast well below the last three years of activity but there are also scenarios showing major growth. These include expansion of exports and reactions to lower interest rates.
Manufacturers’ new orders from the Census Bureau jumped up fairly dramatically after two months of decrease. They were up 5.0%. The big inventory build that drove numbers for a year ended but there was a surge as retailers sought to react to potential shipping issues. There was also a response to expanded construction activity anticipated if and when interest rates sag. Manufacturers are still showing a decline in demand for all jobs.
Product Shortages? Relevant. – There is not the crisis that gripped the supply chain during Covid but the combination of Red Sea rerouting and the potential for strikes that shut down the US East and Gulf Coast ports has created a significant concern regarding commodities and parts. Long term there are worries that trade relations will further deteriorate between the US and China. There is considerable business done in the manufacturing sector and there are no ready alternatives. There is still a good bit of inventory building taking place in reaction.
Technology and Labor – Relevant. – The labor shortage remains a top priority although there have been some small improvements. The number of jobs on offer has declined a bit but are still above normal. The unemployment rate has risen just slightly and wage growth has slowed a bit. None of this has been enough to seriously alleviate the core issue. By the end of this decade, the entire Boomer population will have reached retirement age and there simply not enough replacement workers. The most common hiring tactic now is poaching employees from other companies but overall, there is still a major push to deploy technology as a substitute for labor. This is complex and expensive. The capital demands for small and medium-sized companies can be difficult to address. The next big challenge will be the integration of AI. Not only is this investment significant but it also involves a great deal of additional training.
