Services Activity Expands Modestly in July, while Bank Lending Conditions Continue to Normalize

Key Takeaways:

• The Institute for Supply Management (ISM) Services Index rose 2.6 points to 51.4 in July, recovering just over half of its decline from the prior month. The business activity index increased 4.9 points to 54.5, and the new orders index was up 5.1 points to 52.4. The employment index rose 5.0 points to 51.1, its highest level in ten months and its first time in expansionary territory since January. The non-seasonally adjusted supplier deliveries index declined 4.6 points to 47.6, indicating faster delivery timelines.
• Consumer (non-mortgage) credit outstanding increased by $8.9 billion in June, according to the Federal Reserve Board. Revolving credit (largely credit cards) declined by $1.7 billion, the second fall in this category in three months. Nonrevolving credit outstanding (largely student and auto loans) rose $10.6 billion.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in July, showed that negative 1.5 percent of loan officers reported tightening mortgage loan standards on net, the first net loosening in standards since the second quarter of 2022. Net mortgage demand remained weak with negative 14.8 percent of loan officers reporting stronger demand on net, though that did represent an improvement of 4.1 percentage points compared to the prior quarter. The net share of loan officers reporting tightening commercial and industrial lending standards for large and medium firms, which typically leads measure of business credit in those categories, declined to just 7.9 percent, the lowest level since Q2 2022.
• The real goods U.S. trade deficit narrowed by $2.5 billion in June, according to the Census Bureau. Real exports rose 3.2 percent, while real imports were up 0.9 percent.

Forecast Impact:

The improvement in the ISM services index in July continues a volatile period in which the index has oscillated between expansion and contraction for each of the past four months. Cutting through the noise, the longer-term trend has been one of deceleration for more than a year, consistent with our forecast for slowing economic growth toward the end of 2024. Still, the first expansionary reading in the employment index in six months is encouraging news following the disappointing labor report last week. Elsewhere, the smaller share of loan officers reporting tightening lending standards for commercial and industrial lending suggests the credit tightening cycle may be nearing an end and will no longer be a drag on growth moving into 2025, though a continued normalization in credit conditions remains dependent on underlying economic conditions.

Nathaniel Drake
Economic and Strategic Research Group
August 9, 2024

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