Tuesday, November 5, 2013

Service sector still OK

This post adds more meat to the theme of my post yesterday: the U.S. economy is doing OK, there are no signs of distress, no signs of impending recession, and only a few areas that are weak. So why must the Fed continue with its QE bond purchases? At some point they risk being too easy for too long, and that leads to rising inflation.


Like the ISM surveys of the manufacturing sector, the ISM service sector survey finds this very important sector of the economy in reasonably good shape. Just looking at the above chart, you would conclude that the current business cycle expansion is very similar to others.


The economy hasn't been generating as many jobs as it usually would have, and the labor force participation rate is abysmally low, but as the above chart shows, service sector businesses' outlook for future hiring plans isn't greatly different from what it was in the previous expansion. It's even better today than it was in the go-go 1990s.


The chart above tells the same story as the manufacturing sector version featured in yesterday's post. The Eurozone has emerged from recession and is beginning to grow modestly, having significantly underperformed the U.S. due to all the problems related to the PIIGS sovereign debt crisis.

So where's the beef? Where are awful conditions that warrant extreme monetary policy measures?

The only real justification for continued QE lies in the fact that the world apparently remains very risk averse, and thus the demand for short-term safe assets (like bank reserves, which are functionally equivalent to T-bills) remains very strong. But this risk aversion is not likely to continue much longer, given the obvious and ongoing improvement in the U.S. and Eurozone economies.


The above chart gives us the best indication that I'm aware of that the world's demand for safe assets (and by logical extension the world's risk aversion) is beginning to weaken. Demand for gold and short-maturity TIPS has fallen significantly this year, and equity prices have strengthened. There's a lot less need for continued QE. The Fed's next move should be to taper its QE purchases, and it should come sooner rather than later.

5 comments:

William McKibbin said...

The point is that until real working wages, real home values, and the employment to population ratio top historical peaks, QE will continue forever -- plain and simple...

William McKibbin said...

PS: For the record, I would prefer to replace QE with a 2-year moratorium on personal income taxes -- we need to get money into the hands of consumers -- the producers will follow -- currently, the US is suffering from too many goods chasing too few dollars -- such a state is called deflation, which portends depression -- putting more money into the hands of consumers via a 2-year personal income tax moratorium is the proper medicine -- QE is only putting more money into the vaults of Wall Street banks, which is subsequently being used to fund stock buybacks everywhere -- the US needs to seriously consider a 2-year moratorium on personal income taxes in place of the failing QE initiatives.

William McKibbin said...

PPS: Better yet, cancel personal incomes taxes permanently -- the only loser would be Federalism and its sponsors from the military-industrial complex, the medical establishment, Wall Street, and Federal workers -- repealing personal income taxes would cause the US economy along Main Street to blast off!

PPPS: Saving Federalism from itself is at the root of America's economic malaise -- let's face it, the price of Federalism is too high...

Ed Barner said...

Thats the reality !
http://www.socialsecurity.gov/cgi-bin/netcomp.cgi?year=2012

Benjamin said...

James Pethokoukis, AEI, today posts that QE staved off recession in 2013...if the Fed is going to error, I hope they error on the side of growth...we could use some Fat City, bull markets and boom times...

The Fed is still way below 2 percent inflation target...and probably should try to run at 3 percent for a while...

Soe moderate inflation would be just what the doctor ordered...preceded and accompanied by robust growth...

In USA, unit labor costs and commercial rents very soft...inflation will have to drop out of the sky somehow...materialize Star Trek-style because it sure ain't going to happen on the economics on the ground....