Service Sector Solidly in Expansion Territory
- The minutes from the Federal Open Market Committee’s September 15-16 meeting showed that many participants expect further stimulus in their economic outlooks. Participants also noted persistently low inflation and reiterated their commitment “to achieve inflation moderately above 2 percent for some time.” Some participants argued that forward guidance for the federal funds rate should be tied explicitly to inflation moving above the 2 percent target. Finally, participants agreed that the Fed’s purchases of Treasury securities and agency MBS should stay at least at the current pace in order to “help sustain smooth market functioning and… foster accommodative financial conditions.”
- The ISM Service Index rose 0.9 points in September to 57.8 (any reading above 50 indicates expansion). The business activity index rose slightly, while the new orders index jumped 4.7 points to 61.5. The employment index also increased, rising 3.9 points to 51.8, the first month in expansion territory since February.
- The real goods trade deficit (an input into the calculation of net exports) widened by approximately $1.2 billion to $92.3 billion in August, according to the Census Bureau, the largest deficit in the series’ history. While both exports and imports rose over the month, real exports languished nearly 10 percent below February levels, whereas real imports surpassed early 2020 levels.
- Consumer (non-mortgage) credit outstanding fell $7.2 billion in August to $4.1 trillion, according to the Federal Reserve Board. This was the first decline since May and was entirely due to a drop in outstanding revolving credit (largely credit cards), which fell by $9.4 billion, while outstanding nonrevolving credit (largely student and auto loans) rose by $2.2 billion.
- Mortgage applications rose 4.6 percent for the week ending October 2, according to the Mortgage Bankers Association. The increase was driven entirely by refinance applications, which rose 8.2 percent, while purchase applications fell by 1.5 percent, the third decline in four weeks.
Service sector activity continued to expand in September, with the employment component expanding for the first time since the outbreak of the pandemic in the U.S. While this represents the continued recovery of the economy observed in the third quarter, there were signs of slowing growth in other areas. The decline in revolving consumer credit in August suggests that spending may be slowing substantially, potentially a result from the expiration of the enhanced unemployment benefits mandated by the CARES Act. We believe the unlikelihood of further stimulus in the near term could weigh on consumer confidence and potentially limit the pace of recovery. This view was also held by many participants at the September FOMC meeting, who expressed that their economic expectations were based on further stimulus being implemented, otherwise “the pace of the recovery could be slower than anticipated.” In housing, while purchase applications declined, they remained elevated, suggesting further strength in sales in the short-run.
Economic and Strategic Research Group
October 9, 2020
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