Macro Insights Weekly: Goods versus services


The US economy is defying substantial policy tightening, with present growth in the 2% range. This reflects still-robust service sector demand, pushing down a likelihood of recession.
Group Research, Taimur Baig, Duncan Tan05 Jun 2023
  • Granted, goods demand, by consumers and corporates, is in contraction territory
  • But services make up four times the demand; expansion in that area is still firm
  • Strong jobs and wage growth are keeping the economy afloat
  • The divergence between the economy‚Äôs goods and services parts may keep rates higher for longer
  • The Fed will pause in June, but another hike thereafter could be back on the table
Photo credit: Adobe Stock Photo


Commentary: Goods versus services

Despite 500bps of rate hikes, some financial stability concerns in March/April, and a tightening of lending conditions, the ongoing slowdown in the US economy has been modest and orderly. Sector-wise, the slowdown has been most pronounced in the manufacturing sector; the picture is quite different in the services sector, which makes up nearly two-thirds of the US economy. 

The manufacturing story is weak, no doubt. The ISM manufacturing PMI has been in contractionary territory since last October, with no sign of a turnaround yet. Retail sales of goods has flattened out, while corporate demand for goods has also turned weak. The flipside of weakening goods demand in the US is seen in the poor exports figures out of Asia.

But manufacturing and industrial activities make up for the less than a fifth of US GDP, whereas services account for around three-quarter. The picture is quite different there. In housing, for instance, there has seen a slowdown but no collapse. This is striking given the sharp rise in mortgage interest rates over the past year.

Meanwhile, travel, tourism, dining out, and other lifestyle-related spending remains robust, thanks to historically low unemployment, positive growth in real wages, and recent gains in financial markets. This is reflected in the services PMI figures, which have softened but remain firmly in expansionary territory.  With the Atlanta Fed’s GDP Nowcast for 2Q tracking 2% growth, fears of imminent recession keep getting pushed out. The divergence between the goods and services parts of the economy may keep rates higher for longer.


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Taimur Baig, Ph.D.

Chief Economist - Global
taimurbaig@dbs.com
 
 
 

Duncan Tan

Rates Strategist - Asia
duncantan@dbs.com



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