Tuesday, February 5, 2013

Service sector continues to grow


The January reading of the Business Activity Index is consistent with moderate growth, steady as she goes. The uncertainties surround the "fiscal cliff" late last year appear to have had little impact on the service sector.


The January Services Employment Index was surprisingly strong. Service sector businesses appear to have stepped up their hiring activity, and that augurs well for future economic growth.


As the U.S. service sector continues to post moderate growth, its Eurozone counterpart is slowly shaking off the contractionary pressures that have beset the region since the second half of 2011.

It remains somewhat of a mystery to me why the Federal Reserve needs to keep the monetary pedal to the metal (e.g., keeping short-term interest rates at extremely low levels and continuing to purchases additional Treasury and mortgage-backed securities) when the great majority of economic indicators reflect continued growth and little or no threat of a recession, and have done so for the better part of the past few years.


Consider the above chart of private sector non-farm employment. There have been about six million jobs created in the past three years, and at a fairly steady pace. While the economy has not yet fully recovered all the jobs that were lost in the last recession, it is undoubtedly improving and seems likely to continue to improve. Are we so impatient for recovery that monetary policy needs to spend a fifth year in uncharted waters?

11 comments:

Gloeschi said...

It's not a mystery. The Fed is simply fearful that ultra-low long-term interest rates, which the Fed manufactured, are a sign of everyone expecting a recession (as you like to say).

Dr William J McKibbin said...
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Dr William J McKibbin said...
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steve said...

because the fed has always and will always over play their hand. honestly,I truly believe this has more to do with the ego's of fed governors more so than economic need.

Donny Baseball said...

Scott-
Do you really have zero suspicions that the Fed is maintaining its easy monetary policy to shield the federal budget from the consequences of higher interest rates?
Donny B

Scott Grannis said...

I can't rule out any of the Fed's possible motives. But I do know that the impact of rising interest rates on the federal budget deficit will most likely be mitigated to some extent by the fact that higher interest rates will only occur if and when real and/or nominal GDP growth picks up. Stronger growth will boost tax revenues and take pressure off of spending, and that will result in a significant decline in the budget deficit. Indeed, this process is already underway.

Gloeschi said...

Scott, please take a look at the latest CBO report; they say output gap was about 5.5% in Q4 2012. That is substantially below your data.
http://www.cbo.gov/publication/43907

Scott Grannis said...

There is no established method for calculating the so-called "output gap." Like forecasts, it's all about the assumptions one makes. My assumption is simple: I extrapolate the economy's long-term trend growth rate from 1965 through about 2005, which happens to be a little more than 3% a year. Anyone who comes up with an output gap less than my 13%-14% is using different assumptions: namely, that in the past decade the long-term trend growth rate has declined from what it was in prior decades. In other words, they assume the economy is no longer capable of growing 3% a year. Lots of assumptions need to be made by anyone attempting this task. So the conclusions reached are all suspect, including mine. I have at least made my assumption quite clear.

Benjamin said...

The Fed is easy?

How do you explain that fact that six of the last eight CPI readings have been down? Is this a sign that money has been easy. Maybe I need to go back to school. The CPI goes down and people say the Fed is being easy.

They said that about the Bank of Japan too.

Many say the Fed has been passively tight.

I think the Fed has been excessively timid in promoting growth, ever worried about inflation, when the real risk is a Japan style deflationary perma-recession.

BTW, I think we may see a send leg to the equities bull market.

"Once-mighty Dell Inc., which has struggled for years in a competitive and increasingly mobile device-driven industry, will try to transform itself as a private company in a $24.4-billion buyout led by founder Michael Dell."

This tells me that there is money for management LBOs now. Every management of a public company would just love to kick out the shareholders and be the kings.

With interest rates at zero lower bound there is capital galore pouring out of Europe, Asia and the USA.

We could see a nice move up!



theyenguy said...

You write ... It remains somewhat of a mystery to me why the Federal Reserve needs to keep the monetary pedal to the metal (e.g., keeping short-term interest rates at extremely low levels and continuing to purchases additional Treasury and mortgage-backed securities) when the great majority of economic indicators reflect continued growth and little or no threat of a recession, and have done so for the better part of the past few years.

The reason is that we have "QE to Infinity" and as Andrew Hoffman of Miles Franklin communicates ... http://tinyurl.com/a8sca52 ... the Federal Reserve’s ZIRP, and ongoing and even increasing purchases of Treasury, GOVT, and Mortgage Backed Bonds, MBB, has finally turned “money good” investments, such as Nation Investing, EFA, and IFSM, and Global Producers, FXR, bad.

The monetary policies and programs of Liberalism’s pied pipers, Alan Greenspan, Ben Bernanke, Mario Draghi, and Shinzo Abe, while have creating a financialization credit boom, have resulted in rising U6 Unemployment, Negative Real GDP Growth, over 9.0% Real US Inflation (per Shadowstats.com) and prospective Sovereign and other Defaults, as well as leading the world away from genuine wealth. Please consider that gold re-monetization is about to commence on global debt saturation. The flagship of gold as sovereign wealth is about to rise and set sail, as the Global Central Bank Balance Sheet lowers its mast as Business Insider writes Mario Draghi Can’t Stop The Bubble From Bursting.

Wealth can only be preserved by investing in and taking possession of physical gold, GLD, in bullion form or in Internet trading vault form such as Bullion Vault. The chart of Silver, SLV, shows a close at strong resistance of 31. When and if silver ever becomes an invesment metal is anybody’s guess.

A soon unwinding of the seven month long Euro Yen Carry Trade, EUR/JPY, will create an investment demand for gold, as investors derisk out of stocks, VT, on falling Major World Currencies, DBV, and Emerging Market Currencies, CEW, that is as competitive currency devaluation starts on the exhaustion of the world central banks' monetary authority.

Donny Baseball said...

Scott-
Naturally, I buy your argument that higher rates will be offset by a higher tax take from a growing economy. BUT, I am a believer in the discipline of the market and I believe that we are ripe for a reemergence of the Bond Market Vigilantes, who will force fiscal discipline upon the federal government. That will occur before your smooth balancing out will occur and the interim period will be painful.