Services Activity Slows While Bank Lending Continues Tightening, At A Slower Pace

Key Takeaways:

• The ISM Services Index declined 1.8 points to 51.8 in October, its lowest level since May. Both the business activity index and the employment index fell sharply, declining 4.7 points to 54.1 and 3.2 points to 50.2, respectively. In contrast, the new orders index rose 3.7 points to 55.5, suggesting a possible rebound in other categories in coming months. The prices paid index was down three-tenths to 58.6, consistent with or even somewhat below a typical pre-covid level.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in October, reported a net tightening of residential mortgage loan standards in addition to weaker demand. Net lending standards for commercial and industrial lending, which typically leads business measures of business credit outstanding in those categories, continue to tighten but at a slower rate than in previous quarters. The net percentage of banks tightening lending standards on commercial real estate loans, however, remains near the cyclical-high set two quarters prior.
• Consumer (non-mortgage) credit outstanding increased by $9.1 billion in September after a $15.8 billion decline in August, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $3.1 billion while nonrevolving credit (largely student and auto loans) rose by $5.9 billion.
• The real goods U.S. trade deficit widened by $2.8 billion in September, according to the Census Bureau. Real imports jumped 2.5 percent, outpacing the also strong 2.0 percent increase in real exports.

Forecast Impact:

The decline in the ISM Services Index is supportive of our expectation for a slowdown in growth in the fourth quarter, though admittedly the uptick in the new orders component suggests a possible rebound in coming months. Still, while the headline index has been volatile, it is currently below its pre-pandemic level, suggesting some softening in economic growth moving forward. Additionally, the SLOOS continues to imply that bank lending standards will drag on business credit outstanding, which would in turn limit business fixed investment, though the direction of the net tightening suggests some stabilization in lending conditions. Consumer credit growth was modest in September and, in the aggregate, the level of consumer debt outstanding remains sustainable with incomes. Still, we see rising delinquencies for auto and credit card loans (to above pre-pandemic levels), which signals that some consumers are under significant stress. Additionally, student debt loan repayments will divert money that could have been used on consumption or other debt payments, possibly acting as a drag on the economy in Q4.

The decline in the ISM Manufacturing index gave back most of its improvement over the past three months and returned the overall level to at or near recessionary levels. While this may improve with the likely conclusion of the United Auto Worker strikes, poor consumer confidence and ongoing weakness in new auto sales suggest consumer demand may be softening. This would be in line with our forecast for significantly softer economic growth in the fourth quarter.

Nathaniel Drake
Economic and Strategic Research Group
November 9, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.