Economic Data Tracker –
Services up, but manufacturing down

Trend watch and what’s new this week

The activity-based data has continued to recover as temperatures have  warmed for most of the country (slides 5 and 6). Dining reservations have been especially strong in recent weeks, while hotel occupancy jumped to 64.2%, a 14-week high. The Back-to-Office Index broke 50 for just the second time since the pandemic.

Air passenger counts climbed back above 15 million for the first time in 2023 and continues to track in-line with 2019 patterns. On slide 7, we show air travel bookings, which have climbed for two straight months (December and January) following the typical decline in November. And that’s ahead of the seasonal boost that occurs during the spring months.

Manufacturing contracted for fourth straight month

Two separate gauges showed continued weakness with manufacturing. The Institute for Supply Management (ISM) Manufacturing Index rose to 47.7 in February, the first uptick in six months (slide 8). But a reading below 50 signifies a decrease in manufacturing activity for the fourth month in a row. The prices paid component rose to 51.3, the highest reading in five months. Similarly, the final February reading of S&P Global’s U.S. Manufacturing Index contracted for the fourth consecutive month.

Services indices rebounding

On slide 9, the ISM Services Index had a reading of 55.1 in February, expanding for the second straight month after contracting to 49.2 in December. The price paid component continued its sharp decline, down for the ninth time in 10 months (May through February).

Meanwhile, the final February reading of S&P Global’s U.S. Services Index edged up to 50.6, snapping an ugly seven-month contraction streak.

New orders for core capital goods remain solid

On slide 10, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—fell in January, which was largely due to transportation. Commercial aircraft orders plunged 55% after soaring 105% in January. But new orders for core capital goods, which excludes the volatile aircraft and defense components, rose in February and are just 0.1% below the all-time high set in August.

Auto defaults/delinquencies signal increasing consumer stress

On slide 11, we show the percentage of consumers defaulting on auto loans, which has more than doubled in the past year. Those falling behind on payments—known as delinquencies—are also rising. For subprime borrowers, delinquencies of more than 60 days reached 7.1% in December, the highest rate since 2006.

Our take

While the notion of “no landing” is gaining popularity, we are growing more concerned about the renewed tightening of financial conditions during the past month.

In our view, consumers and smaller businesses are beginning to struggle with higher interest rates, which have dramatically increased borrowing costs. Mortgage rates have a 7-handle once again, while credit card rates are back above 20%. Those tighter financial conditions crimp a lot of economic activity, especially as card balances have ramped higher in recent months. Moreover, there’s a cumulative effect of increasingly higher card rates as the months progress.

Indeed, it’s really a have/have nots situation. Most homeowners are locked into lower rates, leaving them largely unaffected with effective mortgage rates at roughly 3.5%. Moreover, prime borrowers typically carry small or no balance on credit cards.

Furthermore, higher rates are boosting investment returns, particularly for bonds. However, those investment returns are very concentrated within two groups: the high-net worth and older-age cohorts. Meanwhile, those experiencing the dramatically higher rates are literally the opposite two groups: lower income and younger cohorts. Roughly 55% of Americans have stock ownership, less than half own bonds and less than 20% have EVER owned a certificate of deposit.

Additionally, “stickier” inflation remains a challenge for the Federal Reserve (Fed), with a parade of Fed officials publicly debating the possibility of reaccelerating the size of rate hikes to further tamp down inflation, perhaps increasing rates by 0.50% at next month’s meeting. Markets have quickly adjusted, pushing expectations and rates higher, with the yield on the 10-year U.S. Treasury hovering around 4% once again.

In our view, persistent inflation translates into interest rates staying higher for longer. In turn, that spells continued tight financial conditions as a headwind for consumers and businesses.  

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