Monday, November 1, 2010
The October manufacturing report from the Institute for Supply Management came in stronger than expected, across the board. As this first chart shows, the level of the manufacturing index is consistent with GDP growth that is significantly higher than what has been reported in recent quarters. I believe this is one more reason (see my recent post on why the acceleration in M2 growth is another reason) to expect some acceleration in the pace of GDP growth in the current quarter. At the very least, today's ISM report provides zero evidence of any economic slowdown.
Export orders jumped in October, suggesting that the slowdown in exports which contributed to slow the economy in the third quarter is reversing in the current quarter. Growth in exports is a very positive sign, particularly since it is now still apparent that the U.S. is not going to be the engine of global growth as it has been in the past. The most dynamic engines of growth this time around are in the Asia/Pacific region and in the emerging market economies.
Fully 70% of those surveyed reported paying higher prices. This is another strong argument against the persistence of deflationary risks in the economy. The majority has consistently reported paying higher prices ever since the recession ended almost 18 months ago.
Finally, the manufacturing employment index has been at an unusually high level for the past nine months, strongly suggesting that manufacturing employment continues to expand. Growth in manufacturing employment was reflected in the establishment survey of manufacturing jobs beginning early this year, with the exception of modest and disappointing job losses in August and September. With this ISM report it is now likely that we will see renewed job growth in the manufacturing sector (and most likely more than the 1,000 new jobs the market is expecting to see) in the employment report that will be released this Friday.
Given the broad-based strength in the October ISM report, coupled with the ongoing rise in commodity prices, the weakness of the dollar, the continued growth of the economy, and the absence of deflationary pressures in the official price indices, I would argue that there is no need at all for the Fed to resort to another round of quantitative easing. Given political realities, however, they probably feel compelled to "do something." That something is likely to be a modest QE2 announcement—a hundred billion or so of asset purchases in installments—after the FOMC meeting on Wednesday.
Posted by Scott Grannis at 9:17 AM