ACT Research continues to expect a mild recession to materialize, if not as soon as previously envisioned. Broad-based momentum coming out of Q1 increasingly suggests a recession is more likely to materialize in the second half of 2023. Helping to slow overall growth, at least one more interest rate hike is expected as the Fed strives to tame inflation, according to ACT’s latest release of the North American Commercial Vehicle OUTLOOK.

“Our mild-recession thesis is largely predicated on the impact of inflation and the higher interest rates needed to subdue the two-year price spiral. Combined, higher prices and borrowing costs are creating drags on economic activity, freight, and by extension, demand for commercial vehicles. While we take it as a sign that higher interest rates remain necessary, the latest core PCE and employment metrics were encouraging; future rate hikes may only require 25-basis point increments,” according to Kenny Vieth, ACT’s President and Senior Analyst. “One of the factors making the Fed’s job challenging and core PCE elevated is wage inflation, which in turn is exacerbated by a chronically tight labor market.”

The critical factor in forecasting 2023 is when do lower freight volumes, lower freight rates, and higher borrowing costs compress carrier profits sufficiently to kill the cycle? Our current thinking is that the negatives begin to weigh on orders soon, and more meaningfully by the year’s second half. However, with a healthy backlog, early 2023 carrier profitability strength, and the potential for a CARB-induced prebuy in California, there is a compelling case to be made for production volumes to be sustained at end-of-2022 levels through all of 2023.

Vieth added, “The wildcard in any forecast presently is the debt ceiling. While the Fed plays a major role in determining consumer and business borrowing costs, the all-too-familiar disfunction in Washington about another debt ceiling battle may serve to pause business investment, unnerve investors, and spike interest rates even higher, which could induce a deeper recession sooner.”