This measure of the ISM service sector index that I have been following has dipped in the past two months, and that is somewhat discouraging. But it's hard to read much into the monthly change in any index like this, since it is chronically volatile, rising and falling almost every other month. What I do see is a strong gain in the index over the past 18 months, and the fact that the index is still in positive territory (i.e., above 50). So on balance I think this is modestly positive.
On the other hand, I would note that the employment index has been relatively strong and firm with a slight upward trend over the past several months. Manufacturing employment also looks relatively strong. Both are very positive signs, since they show that businesses are hiring and that is the only way the economy is going to post growth of more than the ±2% that the "new-normal" folks are talking about. Rising employment is also a sign that businesses are willing to invest in the future. As a supply-sider, I think that signs of investment are much more important than whatever we see in the personal income and spending data, which so far have not been very impressive. A dollar invested today in new plant and equipment, new jobs, or a new venture represents a new future stream of dollars and higher living standards on average. Demand doesn't drive the economy, supply (i.e., work, investment and risk-taking) does.
Dudes, we have Japanitis, it is settling in. Low inflation-deflation low growth-no growth-recession.
ReplyDeleteThe big Q: Can stocks do well in a deflationary environment? Some stocks with foreign sales may do okay.
Property values? Dead in the water.
Forget small business hiring in America---they get capital from property equity, And there isn't any left.
The Fed is fighting the last war, the one against inflation. Central bankers love to blah, blah about fighting inflation. They think it makes them look like solons. Right now, it makes them look like martinets.
The current 5 month moving average
ReplyDeleteof the business activity index
corresponds with a 200,000 per
month payroll gain ( using a 3 month moving average of the monthly
payroll change)
There has definitely been a big divergence between big corp and small business. You only need to look at the policy prescriptions to understand why.
ReplyDeleteWe keep paying banks $3B per year in free money and vertical-ize the yield curve so they can lend out to big + global corporations. Ironically, this further deteriorates the local situation in America.
Small business cannot compete against the Fed. It is not about the headline numbers so much as it is about the composition.
What seems to get lost is while we all hoop and holler about policy, the US emerged from the Great Recession with the worst post recession rebound in history.
ZIRP is a symptom of illness, not a signal to launch the next great boom. Japan II is right around the corner.
Time will tell...