August 2020 Volume 2

COVER STORIES

Drilling Down on Our US Industrial Production Outlook We would rather show you our US Industrial Production outlook than describe it to you in words. Here, then, is the rate-of-change we expect for US Industrial Production through 2023:

the second half of 2023 for Industrial Production to break above the pre-pandemic level of annual average activity. 5. That being said, it took 59 months after the Great Recession low for Industrial Production to fully return to its early-2008 peak. We expect full recovery will take about half as long this time around due to the relatively better position of the US consumer and the magnitude of the fiscal and monetary stimulus programs. What to Expect for GDP, Unemployment, and Inflation Our US Real Gross Domestic Product (GDP) outlook calls for rising GDP off a second-quarter low through at least 2023. GDP is expected to break above the pre-pandemic fourth-quarter-of-2019 high around mid-2021. We expect the Unemployment Rate to diminish through at least 2022, but be aware it will likely remain in double-digit territory into early next year. The quarterly US Producer Price Index is likely to form a low by year-end, with Prices moving higher in 2021 and into 2022. Risks to Our Outlook Downside Risks The primary downside risk to our US Industrial Production forecast is the potential for shutdowns to become more widespread, both in terms of the number of states impacted as well as in the breadth of industries shut down. Currently 10 of 50 states have walked back some of their economic reopening efforts. This list includes key states such as California, Texas and Florida. An additional dozen states, including Washington and the Carolinas, have put their reopening plans on hold.That leaves 28 states either in the process of reopening or fully reopened. The downside risk posed to our US Industrial Production forecast by a potential secondary set of widespread shutdowns is large in scale, but there are several factors that lead us to believe it is not probable: 1. First, the economic damage the first wave of shutdowns imposed on the US economy was historic, and the desire to avoid a second such damaging period is strong. 2. Second, advances in treatments for COVID-19 – even without a vaccine – have significantly reduced the mortality rate of those infected. 3. Third, states and corporations are taking additional steps to encourage social distancing. 4. Last, and perhaps most notably, the weekly and daily macroeconomic datasets we track show ascent or, at worst, some stalling in ascent, but no secondary descent. We encourage you to watch the leading indicators (fill out the form at www.itreconomics.com/free-economic-updates if you wish to receive free updates from us) particularly closely in the next few months to see if the tentative lows in the leading indicators continue to hold.

Here is what that same forecast looks like on a data trend basis:

We would like to draw your attention to the following key observations about the forecast: 1. The early-2021 rate-of-change low is similar in amplitude to the business cycle trough of the Great Recession. 2. At the low point, on a data trend (annual average) basis, we expect activity to be above the Great Recession nadir but well below the 2015-16 low. 3. The rate-of-change recovery will be robust. At the early-2022 business cycle peak, the Industrial Production annual growth rate will comfortably exceed that of the business cycle peak in the aftermath of the Great Recession (5.9%, set in early 2011). 4. The data trend recovery, while V-like at the very bottom of the cycle, is not a true V shape. We expect it will take until

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FIA MAGAZINE | AUGUST 2020