Services Activity Improves, Though Business and Consumer Lending Remain Soft

Key Takeaways:

• The ISM Services Index rose 2.9 points to 53.4 in January, its highest level since September 2023. The business activity index was flat at 55.8, while the forward-looking new orders index increased 2.2 points to 55.0. The employment index, which had fallen 6.8 points in December, rebounded 6.7 points in January to 50.5. The prices paid index jumped 7.3 points to its highest level in 11 months, and the supplier deliveries index was up 2.9 points to 52.4, possibly due to shipping disruptions in and around the Red Sea.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in January, showed 9.5 percent of loan officers reported a net tightening of residential mortgage lending standards, down from 16.0 percent the quarter prior. Net mortgage demand remained weak with 49.8 percent of loan officers reporting weaker demand. Net lending standards for commercial and industrial lending, which typically lead business measures of business credit outstanding in those categories, also continued to tighten but at a significantly slower pace than over the prior two quarters. Similarly, lending standards for commercial real estate loans also continued to tighten on net but at a slower rate compared to last quarter.
• Consumer (non-mortgage) credit outstanding increased by $1.6 billion in December following a jump of $23.4 billion in November, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $1.01 billion, while nonrevolving credit outstanding increased $0.52 billion.
• The real goods U.S. trade deficit narrowed by $1.2 billion in December, according to the Census Bureau. Real exports jumped 3.7 percent, while real imports were up 1.8 percent.

Forecast Impact:

The rebound in the ISM services index in January is consistent with other data, particularly strong consumption growth at the end of 2023, suggesting Q1 2024 growth will be above our previously forecasted expectations. Still, we continue to expect deceleration in 2024. This quarter’s SLOOS was more subdued following last spring’s acute banking stress, but lending standards to businesses have continued to tighten on net, supporting our forecast for ongoing sluggish business investment. This week’s consumer credit data showed minimal growth in credit balances after a sharp rise in November, possibly in part due to ongoing changes in seasonal spending patterns affecting the seasonal adjustments. Over the quarter, growth in revolving credit balances slowed somewhat compared to Q3, consistent with the modest slowing in consumption growth in the Q4 2023 GDP report.

Nathaniel Drake
Economic and Strategic Research Group
February 9, 2024

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