Slower accumulation of inventories and a wider trade deficit will drag on growth in early 2023. Inventory accumulation and a narrower trade deficit contributed roughly two-thirds of the 2.7% annualized real GDP growth recorded in the last quarter of 2022.
Wholesaler inventories declined 0.4% in January, while retailer inventories were up 0.3%. Combined inventories of wholesalers and retailers fell by 0.1%. New orders for durable goods fell by 4.5% after a downwardly revised 5.1% increase in December. These big swings are mainly due to large fluctuations of civilian aircraft orders.
Orders for nondefense capital goods excluding aircraft, a proxy for nominal business investment in equipment, rose 0.8% in January, but have held in a narrow range since August 2022. Inventories held by durable goods manufacturers fell 0.1% in January.
The trade deficit in goods widened to $91.5 billion in January from $89.7 billion in December. Exports were up 4.2% on sharp increases in consumer goods, autos, and capital goods. Imports were up 3.4%, with notable increases in autos, consumer goods, and foods, feeds, and beverages.
The ISM Manufacturing PMI rose 0.3 percentage points (pp) to 47.7 in February, but remained below 50 for the fourth consecutive month, indicating continuing contraction in the manufacturing sector. Production fell in February for the third consecutive month, and new orders fell for the sixth consecutive month. Despite weak manufacturing activity, prices paid by most manufacturers rose in February for the first time since September.
The ISM Services PMI eased slightly by 0.1 pp to 55.1 in February. Business activity fell by 4.1 pp to 56.3. New orders rose by 2.2 pp to a very solid 62.6, indicating continued service sector expansion in early 2023. Employment intentions rebounded sharply, pointing to further job gains in the month.
Prices paid fell 2.2 pp to 65.6 in February. While service sector inflation remains elevated, the lower prices index should assuage some inflation worries after the rise in prices paid in the ISM manufacturing survey.
Bill Adams is senior vice president and chief economist for Comerica. Waran Bhahirethan is a vice president and senior economist for Comerica.
