Thursday, September 4, 2014
The U.S. economy is firing on all cylinders these days, to judge from the August ISM surveys. On Tuesday we learned of surprising strength in the manufacturing sector. Today came surprising strength in the service sector. As the graph above shows, the ISM survey uncovered the strongest level of business activity in the service sector in nine years.
The employment index, an indication of hiring plans and a good proxy for business' confidence in the future, reached an eight year high.
The overall service sector index reached a nine year high, and was by far the strongest recorded in the current expansion. Compared to the lackluster service in the Eurozone economy, the U.S. is practically booming.
Current and future indicators of the general health of the service and manufacturing sectors are all encouraging. But to date we haven't seen any meaningful pickup in hiring activity. Businesses may be feeling better about how things are going, but they haven't yet been willing to step up the pace of what has been to date rather lackluster investment. Today's ADP employment report (see graph above) suggests that tomorrow's payroll employment report is likely to show more of the same: growth in private sector jobs of slightly more than 200K per month, or thereabouts. Jobs growth of 300-400K a month is what we'd really like to see, but 200K is no reason to be pessimistic.
Meanwhile, big corporate layoffs have become almost a thing of the past, and weekly claims for unemployment are about as low as they have ever been. Businesses may not have stepped up their hiring activity, but it's been years since they resorted to any significant layoffs. I think this suggests that the economy is on pretty solid ground these days. Nobody is overextended, everyone has tightened their belts, and profits are rolling in by the bushel.
If there is a surprise around the corner, it's more likely to be on the upside than on the downside—more growth, rather than less.
Yet the myth of deflationary threats to growth persists. Just today the WSJ sent me the following alert: "The European Central Bank unexpectedly lowered all its interest rates to fresh record lows ... in an effort to keep ultralow inflation rates from undermining the eurozone's fragile recovery."
Why should low inflation be a threat to growth? This is one of those myths that has been repeated so often that most people now assume it must be true. Sometimes prices need to fall in order for markets to clear; sometimes businesses need to fail in order for their assets to be redeployed by someone else. Why should lower interest rates be a stimulus to growth? Just because central banks keep repeating that they do doesn't make it true.
Monetary policy is not holding back growth, and lower interest rates won't change that reality. Banks already have trillions of excess reserves: a few more or less is not going to change their willingness to lend, or business' willingness to borrow. It's time for better fiscal policies. Governments need to get out of the way by lowering regulatory burdens and marginal tax rates, and by eliminating subsidies.
Posted by Scott Grannis at 9:14 AM