Business Conditions Monthly March 2024

In March 2023, the AIER Business Conditions Monthly Leading Indicator fell to its lowest level in five months, and the Lagging Indicator declined for a third consecutive month. The Roughly Coincident Indicator, meanwhile, rose to its highest reading since September 2023. Respectively, the index levels for March were 58 for the Leading Indicator, 83 for the Roughly Coincident Indicator, and 25 for the Lagging Indicator.

Leading Indicators (58)

Among the components of the Leading Indicator six rose, two were neutral, and four declined.

The rising components within the Leading Indicator included FINRA Customer Debit Balances in Margin Accounts (5.5 percent), Conference Board US Leading Index of Stock Prices (3.2 percent), the University of Michigan Consumer Expectations Index (2.9 percent), Adjusted Retail and Food Service Sales (0.6 percent), the Conference Board US Manufacturers New Orders Nondefense Capital Good Ex Aircraft (0.2 percent), and the Conference Board US Leading Index Manufacturing, New Orders, Consumer Goods and Materials (0.1 percent). The US Average Weekly Hours All Employees Manufacturing and Inventory/Sales Ratio: Total Business were both unchanged from February to March. Declining were US Initial Jobless Claims (-4.2 percent), United States Heavy Trucks Sales (-9.6 percent), the 1-to-10 year US Treasury spread (-9.9 percent), and US New Privately Owned Housing Units Started by Structure (-16.8 percent)

At the 58 level, the Leading Indicator indicates economic expansion among its component measures, albeit at the lowest rate since October 2023.

Roughly Coincident (83) and Lagging Indicators (25)

The Roughly Coincident Indicator, which at 83 reached its highest level since September 2023.

Five components of the indicator rose including the US Labor Force Participation Rate (0.3 percent), the Conference Board’s Coincident Manufacturing and Trade Sales (0.3 percent) and Coincident Personal Income Less Transfer Payments (0.2 percent) measures, US Employees on Nonfarm Payrolls (0.2 percent), and the Federal Reserve’s Industrial Production index (0.1 percent). The Conference Board Consumer Confidence Present Situation index fell 0.5 percent.

Meanwhile, the Lagging Indicator had one rising, one neutral, and four falling components in March 2024. US Commercial Paper Placed Top 30 Day Yields rose by half of one percent, and the core CPI year-over-year was unchanged. US Manufacturing and Trade Inventories fell (0.1 percent), as did Census Bureau’s Private Construction Spending (Nonresidential) (down 0.2 percent), Conference Board US Lagging Commercial and Industrial Loans (0.9 percent), and the Conference Board US Lagging Avg Duration of Unemployment (3.3 percent).

As noted last month, the Roughly Coincident Indicator has remained the most consistent of the three Business Conditions Monthly metrics, showing expansionary trends going back to late 2022 with two brief retracements in 2023 (January and October). The Lagging Indicator, on the other hand, has given mostly neutral or contractionary signals since April 2023 other than in August and November 2023.

Discussion

April and May of 2024 have seen a number of anticipated developments in the US economy materialize.

April 2024 jobless claims indicated layoffs on the rise, suggesting labor markets are cooling more rapidly than expected. More data will be needed to see if this is a developing trend or a larger-than-normal seasonal effect. If the U-3 rate, which hit 3.9 percent in February and again in April reaches the 4.0 percent level in May or June, the Fed will have an alibi for cutting rates during the summer. For the week ending May 4, initial claims for unemployment insurance surged to 231,000 on a seasonally adjusted basis, surpassing both the prior 209,000 and the consensus forecast of 212,000. Claims surpassing 250,000 would strongly suggest sagging employment conditions, which in conjunction with a 4.0 percent U-3 reading are likely to meet FOMC Chairman Jerome Powell’s stated criteria of an “unexpected weakening” permitting a more accommodative monetary policy stance. Notably, both New York and California reported the largest gains in unadjusted claims, with California’s recent minimum-wage hike potentially leading to 30,000 to 90,000 job losses and an 0.2 to 0.5 percent increase in the state unemployment rate. For the week ending April 27, continuing claims rose by 17,000 to 1.79 million on a seasonally adjusted basis, with the insured unemployment rate steady at 1.2%. A report from Challenger, Gray & Christmas, Inc. on May 2 indicated that while job cuts decreased by 4.6 percent year-over-year in April, hiring plans were at their lowest since 2016.

Additionally, if the U-3 unemployment rate rises to 4.0 percent in the next two months, it would trigger the Sahm Rule for identifying a recession. The U-2 unemployment rate, which tracks job losses and the end of temporary jobs, increased to 1.93 percent from 1.81 percent, continuing its upward trend from last year. Another indication of weakening employment conditions, the six-month moving average of net unemployment flows, remained negative for the twelfth consecutive month.

US consumers, who for well over a year have defied predictions of flagging spending capacity, appear to be pulling back. Looking first at sentiment, elevated inflation and a cooling labor market have pushed consumer confidence to its lowest level since July 2022. Responses to Conference Board surveys suggest consumers may limit discretionary purchases going forward. The Conference Board’s headline consumer-confidence index fell to 97.0 in April from a downwardly revised 103.1, below the consensus forecast of 104.0. Expectations for the future dropped to 66.4, also the lowest level since July 2022, from 74.0 prior, a level frequently signaling economic contraction over the subsequent twelve months. Consumers are increasingly concerned about their families’ financial situations over the next six months, with 53.8 percent expecting higher interest rates in the year ahead. The assessment of the present situation dropped to 142.9 from 146.8, with fewer consumers seeing jobs as plentiful (40.2 percent vs. 41.7 percent) and more reporting difficulty finding jobs (14.9 percent vs. 12.2 percent). Perceptions of buying conditions have softened amid persistently high financing costs, with rising delinquency rates on auto loans and credit cards, particularly among low-income borrowers. Americans are becoming increasingly concerned as their incomes are squeezed, and consumption will likely continue to slow.

April 2024 statistics on actual/realized spending activity substantiates the aforementioned surveys. US retail sales stagnated after downwardly revised gains in the prior two months, reflecting the growing impact of high borrowing costs and mounting debt on consumer behavior. The US Commerce Department reported that the value of retail purchases, unadjusted for inflation, remained largely unchanged from the previous month, following a revised 0.6 percent increase in March. Much of the spending during April was on necessities such as food and gasoline. A median forecast in a Bloomberg survey of economists had predicted an 0.4 percent rise, but excluding cars and gasoline, sales actually dropped 0.1 percent. Seven out of 13 categories of retail goods posted falling sales, with declines led by non-store retailers, sporting goods, hobby merchants. Sales receipts at gas stations rose 3.1 percent amid higher pump prices, and auto sales declined. In the aggregate, both actual consumption and sentiment figures suggest a distinct softening in consumer demand, which since 2022 has been a key driver of broad economic resilience. Amid signs of declining labor market health, elevated prices and interest rates (the last time the prime rate was at its current level was in February 2001) are squeezing household finances, significantly crimping discretionary purchases. Household debt reached a record high in the first quarter of 2024 and the proportion of consumers struggling to repay debts rose, according to the Federal Reserve Bank of New York, signaling tighter budgets and less optimism among Americans.

The April Consumer Price Index (CPI) data released on Wednesday, May 15th showed that underlying inflation cooled in April for the first time in six months, indicating that price pressures are gradually easing and supporting the Federal Reserve’s strategy to maintain higher interest rates for an extended period. The core CPI reading was the lowest of the 2024, indicating some positive disinflation trends. Likely encouraging to the Fed was data showing the long hoped-for disinflation in housing rents. Growth in primary rents eased to 0.35 percent from 0.41 percent, with owners-equivalent rent (OER) rising from 0.42 percent to 0.44 percent. Market rents suggest that both OER and primary-rent inflation will continue to slow throughout 2024, with annual overall shelter inflation potentially falling to 4.0 percent by early 2025 from 5.6% in April. Nevertheless, strong inflationary pressures were evident in car insurance (up 1.8 percent). On a one-, three-, and six-month annualized basis, core CPI rose by 3.6 percent, 4.1 percent, and 4.0 percent, respectively. (In March those annualized changes stood at 4.4 percent, 4.5 percent, and 3.9 percent.)

Disinflation became somewhat less entrenched in April, with the share of core spending categories experiencing outright deflation declining to 38 percent from 42 percent. Additionally, the share of categories with moderate annualized monthly inflation of zero to 2.0 percent rose from 11 to 12 percent as categories with annualized inflation between 2 and 4 percent decreased to 5 from 6 percent. Of particular note, the share of categories with annualized inflation above 4 percent rose from 40 to 45 percent. This trend will likely be watched closely by policymakers in coming months. While the April 2024 CPI report may bolster the Fed’s confidence regarding their progress in the battle against inflation, they will look more closely at the Personal Consumption Expenditure release on May 31st. All told, after the bumpy start to 2024 Fed officials are likely to seek more conclusive data and evidence of the resumption of disinflationary trends than they might have at the end of 2023.

The weak industrial production report for April may have been worse but for unseasonably warm weather, which increased electric power output. Declines in most production categories were offset by the rise. The output of consumer durable goods and business equipment fell, suggesting manufacturers anticipate heightened sensitivity to interest rates from consumers and businesses in the months ahead. Having said that, it should be noted that the volatility of industrial production data early in the first half of a given year tends to reduce the signal value of March, April, and May reports. US manufacturing activity dropped 0.3 percent, falling short of consensus expectations. Consumer goods production increased slightly (0.1 percent) while consumer durables decreased by 1.5 percent, indicating rising concerns among producers about consumer interest-rate sensitivity. Despite that, previous gains in auto products and electronics buoyed durables manufacturing earlier in 2024, blunting some of April’s decline. Non-energy consumer nondurable goods production rose by 0.9 percent due to higher output in food, clothing, and chemicals. Mining output decreased by 0.6 percent, a less severe decline than March’s 1.1 percent drop. Capacity utilization edged down to 78.4 percent. In total, while utilities output and consumer nondurables were bright spots, the report revealed significant weakness in key business cycle indicators.

Similar results were seen on the service side in April. The sharp slowdown in activity indicates that monetary policy continues to weigh heavily on the economy, even as firms grapple with high input costs. In surveys, business managers reported “hiring freezes” and challenges related to “inflationary pressure through labor and service costs.” The Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) fell into contractionary territory for the first time since 2022, dropping to 49.4 from 51.4, below consensus expectations of 52.0. The employment sub-index declined to 45.9 from 48.5, a level which may not improve until looser monetary policy measures are taken. The prices-paid component surged to 59.2 from 53.4, with firms citing higher costs for products and services. New orders, a forward-looking indicator of business demand, fell to 52.2 from 54.4, suggesting a broader slowdown ahead. Among the conclusions which can be conservatively drawn from the April goods and services reports: rate hikes are now conclusively exerting pressure on US manufacturing; higher prices are continuing to pose significant challenges for American businesses; and employment challenges are creeping further back in the term structure of production.

Since the spring of 2023, our view has been that US economic growth would begin contracting by September 2024. As of April/May 2024, a wide variety of indicators suggest that the anticipated decline is occurring and gaining momentum. We remain cautious, as economic statistics have been both volatile and reflective of highly unusual underlying conditions since pandemic policies were lifted three years ago. While recent data aligns with our spring 2023 forecast, the expression of waning economic circumstances may not be reflective of prior slowdowns and recessions.

(Note: Shaded areas indicate NBER-designated periods of recession.)