Wednesday, February 3, 2010

Service sector continues to improve

The ISM's index of business activity in the service sector has been 50 or above since last August, and that is consistent with a modest improvement. Nothing to write home about, but I would note that conditions today are about the same as they were in March and April of 2003, just a few months before the Bush tax cuts were enacted and the economy subsequently took off like a rocket in the second half of the year. Miracles can happen: what if Congress refused to allow the Bush tax cuts to expire? Since almost everyone expects tax rates on income and capital to rise beginning in 2010, it would be very bullish for the markets if they were instead held steady.


alstry said...

As a supply-sider, you don't believe that consumption drives economic growth, but rather the driver of growth is supply, and supply goes up when people work more, when the factors of production become more productive, when investment goes up, and when risk-taking goes up.

What would be the result if the driver of growth was spending.....and spending went up when people were loaned money. For example, if you loan a homeless person $10,000....he will spend up driving growth...especially if he is an alcoholic and you are a nearby liquor store.

Because of you, I now appreciate that lending is simply shiftiing demand from one to another. But if we are shifting dollars from savers and transfering it to spenders, what happens when most of the savings is consumed by spenders and there is little savings left for productive usage?

Scott Grannis said...

To begin with, spending is consumption, and neither can create growth out of thin air. Giving money to a drunk cannot create growth, even if he spends all the money immediately. The money he spends is money I don't spend.

The problem with the federal government spending money that it has to borrow is that a) it can't generate new growth, it only redistributes money, and b) it absorbs savings from the economy that could otherwise be put to more productive use. The federal deficit today is a net drag on the economy.

alstry said...

I understand and agree with you completely now.

But what if the past eight years of growth was simply taking savings from our pensions and retirement accounts, who really have no consumption demand, and loaning it to homeowners, businesses and municipalities to create short term growth through consumption?

And now that we have consumed our retirement savings through consumption and malinvestment....we have very little for productive usage.