Thursday, December 3, 2009





The November ISM service sector activity index fell unexpectedly, but my reading of the top chart is that it normally moves in a sawtooth fashion, so this is more noise than it is signal. The same thing, only in reverse, occurred with the service sector prices paid index, which jumped in November. The thrust of both series is unchanged: conditions are improving, and pricing power has returned. The return of pricing power is a stark reminder that deflationary forces are not only in retreat but never had a chance to gain a foothold. Unfortunately, the Fed is still fighting the deflation battle when it could be propping up the dollar instead. Yes, things are far from perfect, but they are nevertheless much better on the margin.

9 comments:

brodero said...

This is a pretty technical comment
but the new orders portion of the ISM non manufacturing index and the
business activity portion move pretty much in lockstep. The numbers today have a differential of 5.5 this is the widest it has ever been in the history of this index.Either business activity picks up of new orders drops off.
Based on prices paid and new export
orders I am betting the business activity will pick up.

Bill said...

Scott,

Aren't the declines in both ISM indexes, plus the decline in durable goods last month a disturbing trend?

Scott Grannis said...

No series moves in a straight line. Government generated statistics are always subject to random fluctuations. You have to expect periodic setbacks. You have to keep an eye on the broader fundamentals such as unemployment claims, commodity prices and equity prices, which are still improving. Plus, I don't see that there has been any big change in the policy fundamentals that would justify a legitimate setback to progress.

Игры рынка said...

Deflation (or inflation) is not about pricing power. You can look at it as demand/supply equation. As long as money in the economy is destroyed we are in the deflation. And money is destroyed at ever increasing rate

Scott Grannis said...

Deflation only happens when there is a shortage of money relative to the demand for it. The evidence I see suggests just the opposite: gold and commodities are rising because there is an oversupply of money in the world.

Игры рынка said...

gold and commodities are rising because there is demand for them. not because there is oversupply of money.

deflation happens because amount of money relative the volumes of assets goes down which means that asset prices in terms of this money goes down. You can measure prices in USD, GLD, CLA, or any other measure. However currently credit money of USD is being destroyed at ever increasing pace

Scott Grannis said...

I think you are making the mistake of equating "credit money" with "money." Yes, "credit money" is being destroyed as bankruptcies increase, but that is not the same as destroying money. When you take out a loan you are effectively shorting money. Increased loan demand is equivalent to reduced demand for money.

In any event, the best way to know if money is being destroyed or not is to look at asset prices. All the prices I see are rising, therefore I conclude that there is a surplus of money.

Игры рынка said...

no. you make mistake. if you short something then somebody goes long. net effect on volume is zero.

Scott Grannis said...

Let me try again. Credit can expand without any help from the Fed. Credit can be destroyed without having any impact on money. But you don't have to know anything about credit or money to know whether there is too much or too little money. You just have to look at asset prices: the value of the currency, gold, commodities, the shape of the yield curve, and credit spreads. The combination of those market based indicators can tell you whether monetary policy is too easy or too tight. That's all you need to know.