Wednesday, May 5, 2010

The service sector looks reasonably healthy

Activity in the service sector is holding up nicely. In fact, the ISM measure of business activity in the service sector is as strong as it's been since mid-2006. Not much in the way of new hiring, though, with the employment index hovering just under 50 for the past three months.

But there's no sign of deflation coming from the nation's purchasing managers, as this next chart shows. On balance, about two-thirds of those surveyed report paying higher prices. (Clarification: deflation is properly defined as a decline in the general price level. That prices may be falling in some areas of the economy is not deflation, since that represents a change in relative prices: some prices are always rising and falling relative to each other as market conditions change. When a clear majority report paying higher prices, though, we do not have deflation.)


Benjamin Cole said...

It would be nice to know if purchasing managers are reporting paying higher prices compared to the bottom of 2009, or to the top of 2008.

If you buy a factory today in los Angeles, you will pay more (probably) than in 2009, but less than 2008.

I would call what we are in now a reflation. Nobody today in real estate and construction is paying more than they did in the boom years, for land or materials or construction or architectural services etc.

In certain commoditries, such as coal and oil, there is terrific demand from China. China has gone from being an exporter to being a voracious importer of coal in the the several years. Thus some commodity prices could rise even as the US economy remains in the doldrums.

Scott Grannis said...

It's my understanding that the survey asks respondents to indicate whether (for example) they are paying higher prices in the current month than they paid in the previous month.

Benjamin Cole said...


That makes sense. At some point, I think we see even these modest price gains flatten out, as we reflate to "normal" price levels.

For owners of industrial space in Los Angeles, it make be five years or more (assuming economic growth) before we regain price levels of 2007-2008 in terms of rents or sales prices.

Much of the commercial real estate scene is the same, in SoCal.
Residential may be roughly the same--it is hard to imagine the peak values of 2008 coming back soon.

I realize that SoCal real estate is not the world. But from what I read property markets elsewhere are roughly the same.

I think inflation has been tackled behind the line of scrimmage, and it will be many innings before it gets up off the canvas and forces the Fed to try any full-court presses.

John said...


The problems in Europe's bond markets are helping the Fed doves' case. Out 10 yr treasury is spiking, showing fear is again rearing its head.

Hard to argue raising rates....for the time being.

Benjamin Cole said...


I hope the Fed prints money until the plates melt.

BTW, I have been researching Japan a bit, ever since I came across the fascinating report that the Japanese are selling gold, and that in yen gold is half-price compared to 1980.

Real GDP per capita in Japan has quadrupled since 1980--hardly the picture of "sluggish growth" we ususally hear about.

GDP per capita rose by more than 5 percent annually, for four years straight, from 2003-2007.

As measured by M1, the Japanese money supply has quintupled since 1980. Still, gold is worth half in yen today what is was worth in 1980.

I am not sure what any of this means, but I think it means that Asia has a terrific future. Even the water-locked nation of Japan, with a shrinking population, trade barriers and regulations, is able to put up huge numbers.

Europe may muddle through, along with the United States.

China's economy will eclipse ours, in total size, in another 10 years.

Invest in the Far East. But not in gold.