Services Activity Approaches Stagnation as Trade Data, Factory Orders Also Point to Slowing Economy

Key Takeaways:

• The ISM Services Index declined 1.6 points to 50.3 in May, its lowest reading since December. The new orders index dropped 3.2 points to 52.9, while the business activity index declined five-tenths to 51.5, remaining at its lowest level since May 2020. The employment index declined 1.6 points to 49.2. The prices paid index was down 3.4 points to 56.2, its lowest level since May 2020 and lower than its average in the three years preceding the pandemic.
• Consumer (non-mortgage) credit outstanding increased by $23.0 billion in April, roughly equal to the $22.8 billion increase in March, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $13.5 billion, while nonrevolving credit (largely student and auto loans) rose by $9.5 billion.
• Factory orders rose 0.4 percent in April, according to the Census Bureau. Orders of durable goods were up 1.1 percent, while nondurable goods orders were down 0.1 percent, the third consecutive monthly decline.
• The real goods U.S. trade deficit widened by $13.6 billion to $95.8 billion in April, according to the Census Bureau, the largest deficit since June 2022. Real exports declined by 5.6 percent, while real imports were up 2.4 percent.

Forecast Impact:

The ISM services index fell to a level consistent with near-term economic stagnation, which is in line with our forecast. Still, we don’t think this signals an imminent recession (though we continue to call for one in the second half of the year). Part of the headline drop was due to ongoing declines in the prices paid index, which probably signals a better balance between labor demand and supply more than a sharp contraction in activity; the activity and new orders indices were each higher than the headline index. Additionally, the level of the prices paid index is now more in line with what occurred pre-pandemic, suggesting inflationary pressures are easing in the services sector, in addition to the goods sector.

Consumer credit grew rapidly again in April, though relative to incomes, the level outstanding remains below pre-pandemic levels after the one-time boost to incomes in January resulting from inflation-adjusted bumps to social security payments and tax brackets. While we expect consumption will weaken in the near-term, in part because credit conditions are considerably tighter now than they were before the pandemic, it’s possible that consumers can still turn to credit to keep consumption growth positive for a bit longer than previously expected. Still, trade data suggests the economy is slowing rapidly both domestically and abroad, and factory orders were sluggish, continuing to support our forecast for a recession by the end of the year.

Nathaniel Drake
Economic and Strategic Research Group
June 9, 2023

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