US Economy: Weekly Commentary – January 22, 2024.
Synopsis of US market sentiments
The manufacturing sector is suffering, the labour market is resilient and there are more inflationary pressures due to the Red Sea conflict. We continue to expect the Federal Reserve to cut rates in the third quarter of 2024.

The economy is beginning to show signs of weakness. The manufacturing sector is collapsing, however, tensions in the Middle East are rising, consumer confidence is improving, and the labour market remains strong, putting pressure on the Federal Reserve over future rate cuts and lowering the likelihood of seeing them in March. Our stance is that rate cuts will occur later than most expect and position for one in Q3 of 2024.
Manufacturing commentary
Business activity in New York suffered a huge drop in January. The economy is starting to show more and more signs of weakness. This would indicate rate cuts a possibility, however with the uptick in inflation the Fed will hold the rates unchanged up to the second half of the year.

The business activity dropped sharply in New York State in January. The headline general business conditions index fell 29 points to -43.7, its lowest reading since May 2020, however if we don’t take covid period, the NY manufacturing sector suffers one of the biggest collapses (ex-covid) in history. Furthermore, the current situation is worse than the landscape lived during the 2008-09 crisis. New orders and shipments dropped 49.4 and 31.3 respectively. Delivery times shortened to -8.4 from -15.6, inventories edged lower to -7.4 from -5.2, while employment and the average workweek declined modestly.

Besides, saw declines in employment and hours worked. The prices paid index climbed seven points to 23.2, signalling a small pickup in input price increases, while the prices received index held steady at 9.5, a sign that selling price increases remained modest.

In the months ahead, the companies expect conditions to improve. So, they are optimistic with the future as the index for future business conditions showed with a climbing seven points to 18.8. Even the capital spending increased ten points, which means there are some improvements in investment plans.

Overall, this drops in the business activity in January remark the second consecutive huge decrease. US is struggling with the manufacturing sector, even this index could decrease more due to the issues in the Red Sea. This sector could be the main issue for the economic growth during 2024.
Consumer commentary
Retail sales rose at the strongest pace in three months in December, closing out a year of surprising economic resilience largely driven by the US consumer and government spending. Consumer sentiment also improved in January.

Retail sales soared 0.6 per cent month-over-month in December 2023, following a 0.3 per cent rise in November and beating expectations. All data above expectation as those that doubt the resilience of the American household keep losing. That increase is normal at the end of the year, in December is the Christmas season and some retailers offered discounts to incentive those purchases, so consumers increase their purchases. Even, the increase was big, which indicate that the US consumer is still spending despite high rates and inflation uptick.

The households have continued a healthy pace of spending, despite high rates, thanks to a relatively strong labour market and inflation decreases. Although spending has cooled from the rapid pace of the third quarter, it has been enough to keep a much-feared recession at bay. Even this strength in consumer spending increases the risk of inflation rebounding.

Consumer confidence surged to 78.8 in January, reflecting a remarkable 29 per cent increase over the past two months—the most substantial jump in two months since the recession's end in 1991. While this data bodes well for the economy, it has challenges for market expectations regarding rate cuts. On the flip side, inflation data offers a comforting contrast, with expectations for the next year falling to 2.9 per cent and the five-year outlook settling at 2.8 per cent.

Our forecast suggests a moderated pace in consumer spending, extending at least until the summer. A decline is deemed necessary to prevent a potential resurgence of inflation in January, posing a significant concern for the Federal Reserve's decision-making. Additionally, the upcoming months are expected to witness a decline in consumer sentiment, primarily driven by the inflation rebound.
Housing market
The housing market is starting to show a good sign of recovery. Mortgage rates are decreasing leading to greater demand for housing.

In December, privately owned housing starts reached 1.46 million, surpassing the consensus forecast of 1.43 million. The preceding month's figure was revised downward from 1.56 million to 1.525 million. Despite a decrease of 4.3 per cent, December's housing starts were 7.6 per cent higher than the rate recorded in December 2022, which was 1.357 million. Single-family housing starts in December fell by 8.6 per cent from the revised November figure of 1.124 million, but it marked a substantial 16 per cent increase compared to the same period one year ago. Building permits, a key indicator for future starts, reached their highest level since May 2022. This aligns with the latest builder survey, indicating a boost in builder sentiment and optimistic expectations for future sales. Among the components of the homebuilder sentiment index, sales expectations for the next six months surged by 12 points into positive territory, reaching the highest level since July 2023. Lower mortgage rates, now at 6.66 per cent, are attracting buyers and fostering confidence among builders. Additionally, the limited supply of existing homes is steering buyers toward new home purchases.

Existing home sales experienced a 1 per cent month-over-month and a 6.2 per cent year-over-year decline. This downturn marks the lowest level since the real estate bubble blew up in 2010. Moreover, the entirety of 2023 surged as the most challenging year in the housing market since 1995. Despite these challenges, the median price of existing homes saw a 4.4 per cent increase, reaching $382,600.

Our perspective is that the market will witness an expansion in offerings, particularly for new homes, as mortgage rates decline. This trend is anticipated to result in more stable prices, concurrent with an increase in construction activity by builders and growth in inventories.
Labour market commentary
Bostic, a representative of the Federal Reserve, expressed a surprising idea despite the apparent strong labour market, "There is a clear deceleration in the labour market, now achieving a more balanced state"

The labour market exhibits resilience in the initial weeks of 2024. Initial unemployment claims have once again decreased, reaching a notable 187K. Accompanying this decline in weekly claims is an unexpected reduction of 26,000 in ongoing applications, those reported a week later, bringing the total of continuous claims to 1,806 million.

The strength of the labour market adds pressure on the Federal Reserve to contemplate potential rate cuts. The robust labour market introduces doubts, as lowering rates in such a scenario poses a heightened risk of increased inflation.

Our view is that the labour market might experience a gradual cooling in the upcoming months, potentially leading to a rise in the unemployment rate to 4 per cent. Furthermore, the robust market conditions lend weight to the theory of contemplating rate cuts in the latter half of the year, not before.
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