Last week, the ISM Services number came out at 53.4 which was above the consensus estimate of 52. Recall readings above 50 indicate expansion, thus, the expansion in services continued and accelerated last month. Also, we repeat the ISM Manufacturing chart from our last update.
What was a tailwind for growth in 2023, reduced policy uncertainty, will become a headwind for growth in 2024 and 2025. The uncertainty on global policy could be a catalyst for volatility and slowdowns in global economies. As for the U.S., we have two known entities that will likely be the top of the ticket and markets know what to expect with each.
We are hearing the soft-landing analogy turn into a no landing scenario, leaving us “cruising at a high altitude with turbulence”….take it how you will but the growth we saw in Q4 has brought momentum into 2024. Household and corporate balance sheets have improved. These tend to be good things for the markets as the U.S. economy is fueled by consumer spending.
We are also focusing on recent increases in productivity growth and the unknowns around the speed and magnitude of rate cuts. Investors are struggling to come to terms with rate cuts that are designed to normalize monetary policy rather than stimulate. Which means rates will likely be higher longer, but mostly because this is “more normal”.
Manufacturing and Services
On the positive side, we are seeing activity pick up in both manufacturing (albeit still in contraction) and services which is positive for economic growth. However, for the Fed to truly believe that inflation is moving “sustainably” towards 2%, then inflation in services must also moderate. An increase in the ISM services index tends to support inflationary pressure. Also, if manufacturing turns towards expansion, we would expect future inflation to also increase. Therefore, it seems the Fed will have reason to continue to keep rates steady.
Next, we got a reading on trade. While both imports and exports increased in the last quarter, year-over-year growth for real (inflation adjusted) imports remains negative while the rate of growth for real exports remains positive but has declined.
Also, since imports are larger than exports, the net effect is that total real trade is only slightly positive in the last year. It is this weakness in trade that supports the idea of constrained growth in the near future. Moreover, with many shippers choosing to avoid the Red Sea, thus adding time and expense to the shipping of goods around the world, we would expect the cost of shipping to increase without any increase in the total volume of trade.
Credit Card Delinquency
Finally, there were several headlines last week about the growth in credit card delinquency. While the total numbers have increased, in terms of percent of disposable income, the number is not so bad.
Because U.S. household debt as a percent of disposable income is near historical lows, we would not expect an economic downturn to have the same effect as the 2008-09 recession.
Overall, we consider the odds of a recession to be about 50/50 and we expect to see an increase in volatility this year.
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