Wednesday, December 4, 2013

The economy continues to grow, so bring on the taper

Recent statistics clearly reflect an economy that continues to grow. The economy has been growing and improving slowly, but it has been making upward progress for almost four and a half years now. It's hard to see what's keeping the Fed from tapering its QE purchases, and it's easy to see how there is room for short-term interest rates to rise in the not-too-distant future. The health of the economy is just not that bad.

Auto sales in November jumped to a very respectable 16.3 million annualized rate. They've almost fully recovered to pre-recession levels, having risen 13% a year on average since their early 2009 low. That's almost five years of double-digit growth!

People have stopped paying much attention to the ADP estimate of private sector jobs growth, but as the chart above shows, while the ADP number doesn't exactly track the BLS number every month, it's not too far off over time. Between the two surveys, it looks like we are seeing private sector jobs growth of roughly 200K per month on average, with no sign of weakness. Sure, things could be a lot better, but adding 200K jobs every month eventually adds up to something meaningful.  At this rate, private sector jobs will reach a new all-time high by next May.


The November ISM service sector surveys were lackluster, but they don't suggest either deterioration or stronger growth. Just more of the same. Nevertheless, that's still progress.

The above chart shows the yield on 10-yr Treasuries. Since the Fed began its third QE program over a year ago, buying some $45 billion of longer maturity Treasuries every month, yields have risen by almost 150 bps. That's not exactly what the Fed was hoping for. Rather, it's a testament to the Fed's inability to manipulate interest rates. Bond yields are up because the bond market is figuring out that the economy is not exactly at risk, the Fed will not be able to keep short-term rates near zero for much longer, and it's probably past time to begin tapering its QE purchases. The stock market periodically worries about the end of QE purchases, but the truth is that higher interest rates go hand in hand with a healthier economy, so concerns about "tapering" are misplaced. Bring on the taper! Let's show some confidence in the future—there is no reason not to.


William McKibbin said...
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William McKibbin said...

I agree that QE has failed to improve the economy while providing bankers with an unearned payday -- what is needed instead is a 2-year personal income tax moratorium for all taxpayers earning less than $300,000 -- the retained tax savings will enable immediate consumption by the hungry masses -- those earning more than $300,000 annually are already purchasing all the autos, houses, college educations, and toys that they want -- what is missing is the American middle-class consumer who is broke -- let's face it, the problem in America is too few dollars chasing too many goods -- until people have money to spend, the consumer cannot return -- moreover, a tax moratorium would put cash in the hands of consumers (no borrowing or interest rates involved), which is the proper way to enable consumption spending -- again, I call for an immediate 2-year personal income tax moratorium for all taxpayers earning less than $300,000 annually based on the reasoning above.