Tuesday, October 1, 2013

Manufacturing conditions are improving

The September ISM manufacturing report was consistent with a firming and improving manufacturing sector and a pickup in economic growth in general.

The last two months of the ISM manufacturing report are consistent with economic growth of at least 4%, which would be a clear improvement from what we have been seeing over the past year or so.

A decent employment report suggests that manufacturers are somewhat more confident about future conditions.

As the three charts above show, there has been a welcome and overdue improvement in conditions in the Eurozone economy. The Eurozone manufacturing has been above 50 for the past three months, after being in recession territory since mid-2011. Eurozone swap spreads have proven once again to be a good leading indicator of economic conditions, having predicted improvement in the Eurozone economy for the past year. As the last chart shows, the Eurozone economy has indeed pulled out of its 2-year slump, registering positive growth in the second quarter of this year. It's quite likely that the Eurozone economy continued to improve in the third quarter. What's good for Europe is good for the world.

There is nothing in these reports that would justify the need for a continuation of extremely accommodative monetary policy from the world's major central banks. At the same time, there is nothing here to suggest that extremely accommodative monetary policy has been a source of great stimulus. It's more likely the case, as I've suggested before, that monetary policies have not been designed to be stimulative in the first place. The main point of the Fed's Quantitative Easing program was to supply safe assets to a world that has been very risk-averse; to accommodate the world's huge demand for safe assets. The world probably doesn't need much more QE, if any, at this point.

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