Services Industry Remains Strong on Shifting Consumer Demand While Net Exports Weaken

Key Takeaways:

• The ISM Services Index increased 2.1 points in November to 56.5. The headline gain was primarily due to a 9.0-point surge in the business activity index, which rose to 64.7, its highest level since December 2021. The employment index was also up, rising 2.4 points to 51.5. The new orders index declined 0.5 points to 56.0. The supplier deliveries index declined 2.4 points to 53.8 and the prices paid index was down 0.7 points to 70.0.
• Consumer (non-mortgage) credit outstanding rose by $27.1 billion in October, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $10.1 billion while nonrevolving credit (largely student and auto loans) rose by $17.0 billion.
• The Producer Price Index (PPI) increased 0.3 percent in November, according to the Bureau of Labor Statistics. On an annual basis, prices rose 7.4 percent, a slowdown of seven-tenths from October and the slowest annual rate of inflation since May 2021. Prices for final demand of goods edged up 0.1 percent while prices for final demand of services rose 0.4 percent, the largest monthly gain since August. Core PPI (less food, energy, and trade services) increased 0.3 percent over the month and 4.9 percent over the year, a deceleration of five-tenths from October.
• Factory orders rose 1.0 percent in October, according to the Census Bureau. The split was fairly even between nondurable and durable goods industries, as nondurable orders were up 1.0 percent and orders for durables rose 1.1 percent.
• The real goods U.S. trade deficit widened by $8.3 billion in October, according to the Census Bureau. Real exports fell for a second consecutive month, falling 2.5 percent, while real imports rose (also for the second month in a row) 1.6 percent.

Forecast Impact:

The upward movement in both the ISM services index and consumer credit provide further evidence that near-term consumption will likely be stronger than earlier anticipated. We had already planned an upgrade to Q4 personal consumption growth based on strong October PCE and retail sales reports, so these additional data points likely won’t move the needle much. Still, we continue to believe that consumption is likely to ease early next year as tighter monetary policy reduces demand for big ticket items that are frequently financed and labor market conditions loosen. Further, the ratio of consumer credit outstanding (revolving and non-revolving) to disposable income currently sits at 25.1 percent, near its all-time high of 25.4 percent set in 2017, suggesting there is limited capacity for consumers to continue to access credit to boost future spending. Goods prices showed continued signs of easing in the PPI report, likely aligning with weakening global demand and improving supply chains. Services inflation was modestly stronger than the past two months, though, which is something to monitor going forward as consumption continues to shift into services and away from goods.

Weakening global demand was responsible in part for the second consecutive month of a widening trade deficit, though this was largely in line with our expectations and unlikely to significantly alter our forecast. Further, some of the widening was due to a large swing in pharmaceutical trade that is likely to reverse before the quarter is over, supportive of our forecast for a relatively modest impact to GDP from net exports.

Nathaniel Drake
Economic and Strategic Research Group
December 9, 2022

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