Things Business Leaders Can Be Thankful For

Toned-Down Rhetoric From the Federal Reserve

The Federal Reserve Board’s rhetoric and actions have been less hawkish of late:

• The FOMC has held, rather than increased, the federal funds target rate at its last two meetings.
• Furthermore, in ITR Economics’ latest Fed Watch episode, CEO and Chief Economist Brian Beaulieu noted that “Wall Street seems to be building in the probability that the Fed is going to lower interest rates in 2024.”

We could still see the Fed raise rates this year, but these trends suggest we will not:

• The US Total Manufacturing Production 12-month moving average has been declining since the first half of this year and in October dropped to 0.6% below the year-ago level.
• Between US Nondefense Capital Goods New Orders weakening in 3Q23 as high interest rates begin to bite into capital investment, tight credit conditions, a looming commercial real estate problem, and a negative trend in consumer nondurable goods new orders, the Fed is likely to have a “real” serious pause in December about raising rates one more time, and “obviously as things soften up more in 2024, interest rates will likely ease lower” Brian Beaulieu said.

For business leaders, this means:

• Now is the time to start watching for the Fed to lower rates and, when it happens, to take it as confirmation signal for the forecasted 2025 economic recovery.
• Think about what kinds of capital investments will help you maximize your growth through the rest of the 2020s – which will be generally characterized by high prices, higher labor costs, and higher interest rates – and be ready to pull the trigger on any such carefully considered investments when interest rates are most conducive, potentially a year to a year and a half from now.

Relatively Strong Customer

The US consumer – the final source of demand for your products and/or services, remains relatively healthy.

• Real Personal Income (excluding current transfer receipts), a measure that adjusts for inflation, is at a record high and rising.
• Consumers have been saving a rising share of their income since the end of last year.
• Jobs remain relatively plentiful, at 1.6 openings per unemployed person as of September (the latest data).

There are some warning signals we are watching.

• The Credit Card Delinquency Rate, at 2.58% as of the second quarter of this year, the latest data, is rising. However, this metric is in far better shape than in the months leading up to the Great Recession, with the Delinquency Rate averaging 4.25% for 2007.

These consumer trends are in line with our expectations that the 2024 industrial sector recession will be mild and that the overall macroeconomic downturn will be mild by historical standards. You will therefore have the bandwidth to focus on the rise that follows, and that is crucial, because 2025-2030 will be the last chance that many may get for a long while.