ISM Services Index Slumps as Credit Conditions Tighten

Key Takeaways:

• The Institute for Supply Management (ISM) Services Index declined 2 points to 49.4 in April, its first time below the expansionary threshold of 50 since December 2022. Most major indices were down as the business activity index declined 6.5 points to 50.9, the new orders index dropped 2.2 points to 52.2, and the employment index fell 2.6 points to 45.9. Indices indicative of supply chain and other inflationary pressures were up, with the prices paid index increasing 5.8 points to 59.2 (though this followed a 5.2-point decline the month prior) and the non-seasonally adjusted supplier deliveries index rising 3.1 points to 48.5.
• Consumer (non-mortgage) credit outstanding increased by $6.3 billion in March, according to the Federal Reserve Board. Revolving credit (largely credit cards) was up a modest $15 million, the smallest gain since outright contracting in April 2021, while nonrevolving credit outstanding (largely student and auto loans) increased by $6.1 billion.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in April, showed that 4.1 percent of loan officers reported tightening mortgage loan standards on net, the smallest share in six quarters. Net mortgage demand remained weak with negative 19.9 percent of loan officers reporting stronger demand on net, the eleventh consecutive negative reading. The net share of loan officers reporting tightening standards for commercial and industrial lending, which typically leads measures of business credit in those categories, moved up slightly after declining steadily since mid-2023.

Forecast Impact:

The fall in the ISM services index into contractionary territory would be consistent with a sharp slowdown in services spending in the second quarter. However, both the ISM manufacturing and services surveys have been more pessimistic than hard measures of activity in recent quarters. As such, while we continue to expect a slowdown in consumption growth toward the second half of 2024, our near-term outlook for consumption remains fairly robust.

Consistent with this view, March’s virtually flat reading in revolving credit outstanding may be an early sign that consumers are becoming less able to finance future consumption with credit. While the ratio of revolving credit outstanding to disposable personal income remains below its pre-COVID level, higher interest rates are likely putting some consumers under stress: Personal interest payments on all non-mortgage debt as a percentage of total personal outlays has been at its highest level since 2008 over the past three quarters. Combined with renewed signs that banks are keeping lending standards relatively tight for both businesses and consumers in the latest SLOOS, we continue to expect the higher interest rate environment will work to slow growth in the second half of 2024.

Nathaniel Drake
Economic and Strategic Research Group
May 10, 2024

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