Here are some clues from how we finished 2023:
Equipment and Software Investment: The third quarter saw a sluggish performance in Equipment and Software (E&S) investment, with a modest rise of 0.5% (annualized) following a robust 7.0% growth in Q2. The persistently elevated interest rates are anticipated to continue dampening investment throughout 2024, maintaining a relatively weak near-term investment climate.
Momentum Monitor: The latest Momentum Monitor assessment indicates that growth in equipment and software investment is likely to remain restrained across various equipment verticals in the coming two quarters. Despite this, recent improvements in readings for most verticals offer a degree of cautious optimism, suggesting potential for increased investment in the latter half of the year.
Manufacturing: After a lackluster year marked by stagnation in the manufacturing sector, U.S. manufacturers are expected to grapple with similar challenges in 2024. High interest rates continue to impede capital expenditure plans, and while the overall pace of U.S. economic growth is expected to moderate, global demand remains subdued. However, certain key industries, including semiconductors and green energy, may experience a boost from continued federal investments, positively impacting associated equipment verticals.
Small Businesses: Despite benefiting from robust consumer spending in the past two years, Main Street faces increasing pessimism among small business owners regarding near-term sales revenue. Concerns are rising that consumers may be showing signs of reducing spending.
Fed Policy: The Federal Reserve maintained interest rates at 5.25–5.50% in its recent meeting. With a significant decline in inflation over the last six months, if economic growth weakens in late 2023 and early 2024 as anticipated, there may be pressure on Fed officials to initiate rate cuts in the spring, particularly if inflation remains around the 3% mark.
U.S. Economy: The U.S. economy likely avoided a recession in 2023, displaying resilience in the labor market despite higher interest rates. The Federal Reserve’s successful efforts to control inflation without causing widespread job losses have instilled confidence in a “soft landing” scenario. However, caution is advised, as high government expenditures contributed significantly to GDP in 2023 but are expected to have a lesser impact in 2024. Consumer spending may soften amid rising financial stress, and global economic conditions remain fragile.
While a recession in the first half of 2024 remains a possibility, a soft landing appears to be the most likely scenario.