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For now, business spending, especially on capital equipment, is still slow, but that could change in a few months. Inflation-adjusted shipments and new equipment orders have been declining for almost two years, as interest rates have risen, lenders tightened loan standards, and the economic outlook remained cloudy. But that could change as the Federal Reserve starts to gradually lower interest rates sometime around midyear and business sentiment improves as a result of the Fed signal.
Financing costs have eased a bit since last year, now that it appears that the Fed’s rate-hiking campaign is over. But financing costs are still high, roughly double what they were just two years ago. Business demand for loans continues to be sluggish, both because of previous expectations of an economic slowdown and because of higher borrowing costs. Small businesses have been hurt the most by high rates and have pulled back the most on borrowing.
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Labor costs should increase at a slower pace in 2024, but that easing process is happening gradually. Annual wage growth should dip from 4.3% now to about 3.5% by the end of 2024, as the frenzied pace of hiring eases, and as lower inflation reduces cost-of-living pay raises. Wage growth will be highest in sectors with continuing labor shortages, such as health care, and in the Southern states and Texas, where rapid in-migration has increased demand for many services.
The cost of shipping by truck continues to ease as pandemic-era supply chain disruptions have disappeared. Trucking rates are currently running about 5% below last year, and of course, much below 2022 during the shipping crunch. Ocean freight rates had been back at their prepandemic low before the Red Sea troubles arose, causing 80% of the freight that had been going through the Suez Canal to reroute around the Horn of Africa. Ocean rates have begun to ease a bit as the Red Sea situation has stabilized somewhat, but will likely remain high for shipping in that region until the Houthis in Yemen stop attacking shipping. Low water levels in the Panama Canal caused by drought are still causing delays on one of the world’s most critical waterways, though the rainy season that begins in May could help.
Prices of materials will likely continue to ease or hold steady in anticipation of slower world economic growth. Commodity prices often rise and fall with reports on China’s economy, and China’s growth is slowing, so prices are not likely to rise much. Steel prices have begun to ease. Copper is off its highs, but won’t fall much because of lower supply from Chile, a major copper exporter. Lumber prices may rise a little when the Fed cuts interest rates, as high rates have dampened homebuilding and renovations.
Some qualified good news for electric vehicle battery makers: The prices of lithium and cobalt – two raw materials needed for EV batteries – are still quite low because battery production has outpaced demand.
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