Macroeconomic Outlook

Annual US Industrial Production declined in December, ending the year just above the 2018 level. Activity will decline further into the middle of 2020 before rise takes hold and persists into the first half of 2022. Production will subsequently decline through the latter half of 2022.

Annual US Electric and Gas Utilities Production and annual US Total Manufacturing Production, two of the three major segments of US Industrial Production, are below their respective year-ago levels. Conversely, activity in US Mining Production, the third major segment of US Industrial Production, is rising. Growth in Mining Production will slow into the middle of this year, but the segment will likely avoid recession during this business cycle.

Lead with optimism, as we expect that growth will return for US Industrial Production in the second half of this year.

Several macroeconomic leading indicators support our expectation for US Industrial Production business cycle decline into the middle of this year. Our analysis of trends in the US Total Industry Capacity Utilization Rate suggests that there may be excess capacity in the industrial sector at this time; decline in business-to-business activity, as measured by US Nondefense Capital Goods New Orders (excluding aircraft), is expected to persist into mid-2020. US Domestic Corporate Cash Holdings are slowing, which could further limit business investment in the near term.

However, remember that decline in the US industrial sector is temporary. Leading indicators – ranging from our own ITR Leading Indicator™ to the US ISM PMI (Purchasing Managers Index) to the OECD’s US Leading Indicator – signal that positive business cycle momentum is coming. Lead with optimism, as we expect that growth will return for US Industrial Production in the second half of this year. Consider using pessimism to your advantage by making opportunistic acquisitions of capital equipment at the bottom of the business cycle. This will better position you to capitalize on growth starting in the latter half of 2020 and extending through mid-2022. Keep in mind that increasing inflationary pressures will come with the positive shift in the business cycle. Look to lock in costs, such as interest rates, raw material inputs, and wages, to the extent you are able before a stronger economy drives up prices more rapidly in 2021.

Make Your Move

US Industrial Production will grow during the second half of 2020. Prepare for this rise by focusing on hiring, training, and retention. This will help you avoid quality control problems or capacity constraints as economic momentum builds during the second half of the year.

Investor Update

Despite a tick-down in the S&P 500 in January, the trend is cyclically positive. Persistent upward business cycle momentum in the S&P 500 bodes well for the US economy during the latter half of 2020.

ITR Economics' Long-Term View

2020: Strengthening Second Half

2021: Mild Growth

2022: Second Half Decline