Incoming Data Suggest Return to Modest Growth in Q3

Key Takeaways:

• The ISM Services Index increased two-tenths of a point to 56.9 in August, its second consecutive monthly increase. The business activity index rose 1.0 point to 60.9, its highest level since December 2021, and the new orders index increased 1.9 points to 61.8, also its highest level since December 2021. The employment index was back above the expansionary threshold of 50 after rising 1.1 points to 50.2. Supply chain issues showed continued easing as the supplier deliveries index declined 3.3 points to 54.5, its lowest level since the pandemic began. The prices index was down 0.8 points to 71.5 following a 7.8 point drop in July.
• Consumer (non-mortgage) credit outstanding increased by $23.8 billion in July, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $10.9 billion and now exceeds its pre-pandemic level by $36 billion. Nonrevolving credit (largely student and auto loans) increased by $12.9 billion.
• Light vehicle sales declined 0.8 percent in August to a seasonally adjusted annualized rate of 13.4 million, according to Autodata. The sales rate is more than 20 percent lower than the August 2019 sales rate.
• The real goods U.S. trade deficit narrowed by $10.4 billion in July, according to the Census Bureau. Real exports increased 3.2 percent, its fourth increase in the past five months, due in part to rising energy exports. Real imports were down 2.1 percent, its fourth consecutive monthly decline, likely due in part to supply chain disruptions resulting from ongoing lockdowns in several of China’s major manufacturing hubs.

Forecast Impact:

The small increase in the ISM services index is supportive of our view that the economy has returned to modest growth in Q3. Further, somewhat larger upticks in both the business activity and new orders subcomponents provide further evidence that consumers are gradually shifting their consumption away from goods and into services. This dynamic should support our forecast for declining prices of some goods, especially durables, through the end of the year and could help to explain the fourth consecutive monthly decline in real goods imports. Still, we consider falling imports to be a sign that demand may be cooling generally. Admittedly, though, these data could have also been affected by renewed lockdowns in parts of China, which we expect will likely start to weigh on the U.S. economy in coming months and add to uncertainty going forward.

Revolving consumer credit again increased at a rate that is likely unsustainable in the long-term. Though consumers experienced some relief from inflation in July as gas prices fell, the cumulative effect of price increases to date are likely still stressing some consumers’ finances. Still, as commodity prices decline further, we continue to expect personal consumption to grow at a more rapid pace in the second half of the year before declining modestly in 2023.

Nathaniel Drake
Economic and Strategic Research Group
September 9, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.