Thoughts

June 28, 2024 | 14:11

Looking Under the (Industry) Hood of the U.S. Economy

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Alongside the release of revised U.S. real GDP data for the first quarter, the BEA unveiled the latest set of industry figures. Real GDP grew a robust 2.9% in the past year but downshifted to a 1.4% annualized rate in the latest quarter. What do the industry data say about the economy’s earlier resilience and recent loss of momentum?

Still going strong:

Private goods-producing industries are up 5.9% y/y, which is surprising given that high interest rates have consumer goods spending down by 2.3% and the mighty dollar has pushed the U.S. goods trade deficit to a two-year peak. The imbalance between goods production and demand may flag an unwanted build in inventories that weighs on growth this year.
Driving the gain in goods production is strong oil and natural gas extraction (20.7%). The auto industry has also motored 20.3% amid stronger sales. Meantime, construction surged 8.5%, propelled by a policy-led boom in new facilities for electric vehicles, batteries, and microchips.
On the services side, auto dealers reported a 35.2% spike in sales amid strong job growth. Truck transportation swung higher (5.8%) after an earlier swoon, a welcome development given rising delinquencies in this space.

Growing more moderately:

Private services-producing industries are up 2.4%, somewhat less than growth in real consumer services spending (3.3%), though the latter has ebbed recently.
Other middling performers include warehousing, government, finance, professional business services, education, health care, and accommodation. Think of these sectors as the backbone of a soft-landing economy. Expanding more modestly is the real estate industry (1.1%) due to the weakest home sales in over a decade.

Struggling:

Furniture production was one of the weakest industries in the past year (-4.0%) as so few people are moving to new homes due to mortgage ‘lock-in’.
Declining more moderately are agriculture, food manufacturing, grocery stores and restaurants. This reflects a pullback in American food consumption due to high food costs and the rising use of weight-loss drugs.
Wholesale trade is down 2.0%, though this seems to reflect a multi-year structural shift led by big-box retailers, which are buying more stuff directly from the source (manufacturers) to reduce costs.
Industries showing little change or contracting slightly in the past year include, mining (despite rising EV battery needs), machinery manufacturing (outside of AI-driven computing gear), and, on the services side, arts and recreation.

Bottom Line: There are plenty of industries performing well enough to suggest the economy’s expansion is well grounded. But weakness in the food and housing sectors, and softness in a few services industries, suggest growth will remain subdued until consumers get some relief from elevated interest rates. A soft landing remains intact.