Tuesday, October 5, 2010

Service sector indices not particularly strong

This morning the market was apparently impressed by the higher-than-expected reading on the ISM service sector composite index (and also impressed by Japan's latest attempt to fight deflation by lowering interest rates further). I don't share those views. I've been following the business activity index, and as the first chart shows, it has not been very strong of late, and came in still weaker today. Last month I thought it was just one of those random variations, but now it looks more like the service sector is just plodding along, not growing by any impressive amount. That view is confirmed by the employment index (third chart), which is just barely above 50—signaling very modest growth in employment, if any.

The prices paid index (second chart), however, continues to come in with an unambiguous result: a clear majority of businesses report paying higher prices. Deflation is not an issue.

In any event, I don't see signs anywhere of a double-dip recession. The economy is not growing very fast (I still think 3-4% growth is likely, even though that represents a very meager recovery), but neither is it deteriorating by any meaningful amount. Importantly, the larger economic backdrop continues to look healthy: commodity prices remain very strong, global trade continues to expand, and emerging market economies are doing very well.

The biggest problems the U.S. economy faces are 1) very misguided fiscal policy ("stimulus" that doesn't stimulate, and which leaves dreadful debt burdens in its wake, plus massive expansions of government regulatory authority which stifle private sector initiative), and 2) very disconcerting monetary policy (desperate attempts on the part of the Fed to pump up the money supply and weaken the public's demand for dollars). If policymakers would only stop trying to "do something," the economy is perfectly capable of mounting a robust recovery on its own. I remain hopeful that this will be one of the big messages that voters send to Washington next month. The traditional entrepreneurial spirits that have given us strong economic growth in the past are being held down by bad policies, but they have not been snuffed out.


Bill said...

I attended a Georgia GOP dinner last night with all of our state candidates and a keynote speech from Bobby Jindal, Gov. of La. He's very impressive and told us some amazing stories of how inept the Obama administration handled the spill and it's subsequent crazy moratorium on drilling which is killing jobs in his state. I'm a little worried about some polls showing the Dems might catch up because of views the economy is not that bad. We need the gridlock.

tom said...

"The traditional entrepreneurial spirits that have given us strong economic growth in the past are being held down by bad policies, but they have not been snuffed out."

I agree, the american spirit is alive and well, but we need some hope and change to rekindle it. Not the same hope and change we have seen for the last 18 months.

Benjamin Cole said...

Excellent commentary, but good luck on fighting federal deficits. Gridlock might help, but run for the hills if the R-Party ever gets complete power again.

On monetary policy, I think there are times we have to "suffer"--Volcker in the 1980s and his heroic fight against inflation come to mind--and then there are times when we are suffering for no good reason. Now is one such time.

Inflation is dead, and deflation lurks. Real estate values are way down, and appear squishy even yet. I have never seen so much empty commercial space in Los Angeles.
The economy is sputtering.

Who in Japan in 1990 predicted 20 years of real and equity declines?
They did not go to monetary stimulus, the BoJ pettifogged about price stability, they protected the value of the yen. As a result, they have underperformed statist France.

Bernanke has indicated this is probably the time for monetary stimulus. I think Milton Friedman would agree, based on a paper he authored for the Hoover Institution.

Fom my own vantage point, I say pour it on, whatever it takes to get the economy going, from lower taxes, to less regs, to running the printing presses until they melt.

This baby is wide open for years of solid growth with no inflation. Why are we dithering?

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