Weekly Economic Digest for 9-8-23: Factory Orders; ISM Services Index; and Consumer Credit

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There was not a lot of economic data released this week…only a few pieces of data on U.S. factory orders, U.S. trade deficit, the Institute of Supply Management’s services index, labor productivity for the second quarter, wholesale inventories, and late Friday, consumer credit data for July.

Factory Orders

Two weeks ago we discussed the decline in durable goods orders and the overall slowdown in the goods-producing sector of the economy. Data released this week on new orders placed with U.S. manufacturers was yet further evidence of this slowdown. U.S. factory orders have been steadily declining since April of 2021 and posted their 5th consecutive month of flat or declining growth.

This slowdown is further confirmed by the Institute for Supply Management (ISM) Purchasing Managers Index (PMI) for manufacturing. The PMI is generally considered to be one of the most reliable economic indicators available providing insight into what is happening at the factory level. A reading below 50 means that the sector is contracting. As you can see, the index has been below 50 since October of 2021.

Services Sector

The Institute for Supply Management produces a similar index for the service sector and, like manufacturing, the service sector has generally been slowing since late 2021. However, the index only briefly dropped below 50 in late 2022. The index was released this week and it was expected to decline slightly, but instead ticked up showing that the services sector is still expanding as consumers continue to purchase services.

Household Finances

Last week we mentioned that unemployment ticked up as labor force participation increased and the number of available jobs declined. With labor becoming more available, employers are no longer having to bid up wages to attract talent. For example, Walmart is now paying new store workers less than it was three months ago. According to data from the Atlanta Federal Reserve, median wages in the U.S. are still growing on an annual basis, but they are coming off of the highs of last spring.

Overall, wage and salary disbursements are declining from their peak level of growth in 2Q of 2021, and, not surprisingly, overall consumption as measured by total retail sales is following suit. This is important because as wage growth slows, so too will spending. As we pointed out last week, personal consumption is what is currently supporting the economy and if it slows, so too will overall economic growth.

Even with the slowing of income growth, overall household debt service has remained relatively stable (although as we pointed out last week, revolving debt is starting to become an issue). Household incomes are just now starting to grow faster than inflation (see this graph posted last week) and the pent-up demand for services that was created by COVID-19 is less sensitive to higher rates. Further, the government policies that pumped the economy full of cash allowed many business and consumers to lock in low borrowing costs.

Finally, late Friday, total consumer credit for July was released by the Federal Reserve. Total consumer credit rose $10.4 billion in July, down from a revised $14 billion gain in the prior month. Revolving credit, like credit cards, rose 9.2% indicating that people are still using credit cards to support their consumption…a situation that is going to end badly one way or another.