Wednesday, March 5, 2014

Service sector mixed

The February ISM service sector report brought no relief from the harsh winter weather, and most likely was downbeat precisely because of the weather. Still, the news is mixed and there is no reason to think that the outlook for economic growth—which probably remains a sluggish 2-3%—has deteriorated. 


The Business Activity portion of the ISM report fell slightly in February, and is probably the most representative of what is going on: conditions haven't deteriorated, but they are hovering around the lower end of their four-year range.  


The overall measure of service sector conditions is shown in the chart above, and it fell significantly, to its lowest level since early 2010. This was offset to a degree by an improvement in the same index for the Eurozone service sector. Both the manufacturing and service sector reports for February showed a bit more strength in the Eurozone relative to the U.S., and weather is the likely culprit.



The employment index fell dramatically, and stands out as clearly weak. Does it portend a recession? It would if there were other indicators suggesting the same thing, but I don't see any; this therefore looks like an outlier. It's not hard to imagine that bad weather has disrupted hiring plans.


Meanwhile, I note that industrial commodity prices (see chart above) have been rising for the past four months, which suggests that global economic activity has firmed somewhat despite the apparent weather-related slowdown in the U.S.. We know that Eurozone activity has firmed up, and it's likely that activity in the Pacific rim has firmed as well. With this as a backdrop, and knowing that swap spreads in the U.S. remain at very low (i.e., very healthy) levels, it's unlikely that the U.S. economy is on the verge of another recession.


Early last week I noted the recent impressive acceleration in bank lending, and it continues, as the chart above shows. Commercial & Industrial Loans outstanding at U.S. banks are now up at a 20% annualized pace over the past three months—the fastest pace yet during the current recovery. Recall that thanks to the Fed's aggressive addition of bank reserves since 2008, banks have a virtually unlimited capacity to generate new loans. The only thing holding them back has been a lack of confidence and its companion, a strong demand for money. (Borrowing money is akin to a negative demand for money—until recently, banks and businesses in aggregate preferred to hold on to money and to pay down debt.) That is now changing, and that's very good news. 

10 comments:

William McKibbin said...

According to Scott, "the Fed's aggressive addition of bank reserves since 2008, banks have a virtually unlimited capacity to generate new loans." Unfortunately, none of that lending was targeting toward consumers who simply have no money to buy cars or major end items due to credit constraints. These credit constraints may in fact be a good thing in the long term. However, without consumer credit, the "supply-side" economics approach fails miserably. Despite Scott's optimism, hope for a consumer lead conclusion to the financial crisis is tantamount to ignorance. The only turnaround that we can hope for in an environment of decreasing real wages and credit, is a defense industry lead recovery. I personally reject that approach as unsound both politically and economically. Said another way, Scott is misleading his readers into thinking that a supply-side approach to economic recovery in the US has any hope of reaching Main Street USA. Note that Main Street USA remains mired in economic depression as evidence by long-term declines (>10 years) in real working wages, real home values, and the employment to population ratio. Supply-side economics is a failed approach to economic progress, and we all need to confront those who would argue in favor of failed economic approaches. My goal is to convince Scott of his mistake based on the reality of real working wages, real home values, and the employment to population ratio, which are all Main Street USA measures of economic prosperity. Let me very clear -- supply-side economics is a failed approach to economic policy that has no merit in an environment of economic depression along Main Street USA. Anyone who thinks otherwise is an enemy of Main Street USA.

The Roller said...

Similar to Bill Clinton's 1997 signing of massive supply side tax cuts,

http://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997

in 2012, President Obama too signed into law, (making them permanent), the George W Bush supply side tax cuts.

In the meantime, 2013 Retail sales hit all time record highs.

http://media.ycharts.com/charts/6241d583a204354a2a7cce0ff159e404.png

William McKibbin said...

PPPS: According to FRED data, US real retail sales peaked in January 2006 at $603,000/capita, and remains depressed at $573,000/capita as of January 2014. Retail sales are horrible in the US due to lack of consumer participation. Again, Main Street USA remains mired in economic depression as evidenced by long-term declines in real working wages, real home values, and the employment to population ratio. Real retail sales/capital only add another nail to that coffin. I regret to report that Main Street USA is doomed to oblivion under supply-side economics. Those who advocate supply-side economics will lead Americans into a Mexican-style standard of living. Said another way, ordinary Americans who want to live like really poor people will want to enlist in the supply-side economic lie of the 20th century.

Scott Grannis said...

McKibbin: you really have no understanding of supply-side economics. A big reason the economy is doing poorly is that supply-side theories are NOT being applied. Keynesian theories are still dominant, and they focus, mistakenly, on stimulating "demand." What we need instead is to focus on stimulating supply. We need more risk-taking, more work, and more investment, not more demand. Demand cannot be created out of thin air. Supply is what makes the world go 'round.

William McKibbin said...

Hi Scott, you are mistaken -- creating supply cannot create an economy -- only demand can create an economy -- your argument is from the 20th century -- we are in the 21st century -- supply-side economics is without merit in today's economy.

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

Hi Scott, Just wanted to let you know I have read your blog for years. I have benefited from your sound advice greatly in my investments, mainly by not panicking when most pundits are crying "the sky is falling".

I applaud how gracious you are when replying to opposing comments, I don't know where you get your patience from!

Some people think they know it all, it's there way or no way.

Thank You Scott

The Roller said...

It's called Supply and Demand, (not Demand and Supply), for a reason.... Supply leads demand.

Scott Grannis said...

Roller: Good point!