Wednesday, October 5, 2011

More signs the economy continues to grow

There are two ISM indices that track the overall health of the service sector (the non-manufacturing index, and the non-manufacturing business activity index), and this is the one I have long preferred. It shows that things have actually picked up of late, if only modestly. This is one more economic index to add to the list of recent signs that not only is the economy not entering a recession, but it might actually be picking up a bit. The others would be: weekly unemployment claims, corporate profits, the ISM manufacturing index, auto sales, the ADP employment index, and capital goods orders.

The prices paid index slipped a little in September, but remains well above 50, indicating that there continues to be some upward pricing pressure in a large part of the economy. This is significant, given that the economy in aggregate remains well below (at least 10-12%, according to my estimates) its potential or trend output level. Despite so much in the way of idle capacity, firms are still able to make higher prices stick. This can only reflect the monetary accommodation that the Fed has struggled so hard to achieve. There is no shortage of money out there, and this is a good sign for cash flow forecasts and a welcome relief to all those who are struggling with large debt burdens. Inflation is a debtor's best friend.

The employment index was the only significant disappointment in today's ISM release, since it fell below 50, which implies a modest deterioration in firm's willingness to hire. It's not really surprising, however, given that we already know from last month's payroll report that hiring has been relatively weak.

This is offset to some extent, however, by today's ADP report, which was somewhat stronger than expected, and which provides a good reason to believe that the economy is still on an upward jobs-creating path.

The September surge in announced layoffs, according to the folks at Challenger, Grey and Christmas, might ordinarily be a shocker, offsetting all of the above good news. But the outsized increase was entirely due to the Army's planned troop reductions and Bank of America's decision to thin its ranks. Furthermore, since government cutbacks account for the lion's share of announced layoffs so far this year, I count this as a positive. A smaller government means more room for the more-efficient private sector to grow. As noted in the press release:

It would be easy to look at the September job-cut figure alongside some of the other less-than-stellar economic news that has been reported lately and draw the conclusion that the economy is indeed headed for a double dip. However, it is important to keep in mind that 80,000 cuts, or nearly 70 percent of last month’s total, came from just two organizations: Bank of America and the United States Army ...


Benjamin Cole said...

Greg Mankiw seemed to have called it---a slowdown and stock market correction when QE2 ended.

Why end a program that is working--and does not entail more federal pending and borrowing?

The Market Monetarists say the Fed should target nominal GDP growth, and employ QE to that end, with clearly stated targets.

I am more and more liking the nominal GDP targeting approach. The Fed as misguided Sphinx is getting old.

Tight money after a real estate bust seems to freeze the recession in place. Japan has proved that.

Anonymous said...

The trade deficit for August is going to fall big-time, and as a result we're going to get a surprisingly large Q3 GDP print. At least 3%. 4% wouldn't surprise me. I'm not making this up. You heard it here first.

marcusbalbus said...

you are impossible