Monday, August 5, 2013

Service sector surprises on the upside

Another day, another report showing the U.S. economy is not only avoiding a recession but in fact improving. Say what you will about the increased number of temporary, part-time, and low-paying jobs, it's still the case that conditions in the U.S. are slowly improving. That's a far cry from the recession fears that are still driving the Fed's zero interest rate policy and the public's seemingly insatiable demand for zero-interest safe assets. Today's service sector report is one more in a growing list of reasons why the U.S. economy no longer needs QE. The Fed could begin tapering its QE any day in my book, and it wouldn't much matter. Indeed, it might contribute to bolstering optimism in the future. At the very least, it is becoming abundantly clear—at least to me—that the U.S. economy is well beyond the stage at which it requires QE life support.

The July ISM service sector index handily beat expectations (56 vs. 53.1), and the business activity subindex (shown above) jumped from 51.7 to 60.4. That's quite a turnaround; perhaps there's some noise here, but at the very least it would appear that the service sector is on a solid footing and not even flirting with recession. 

No sign of deflation here: a clear majority of service sector businesses report paying higher prices.

The employment subindex continues to be moderately positive. We're not talking about leaps-and-bounds improvement, it's more a steady-as-she-goes economy that may be getting slightly stronger. 

As was the case with the ISM manufacturing report, the Eurozone service sector appears to be on the cusp of emerging from a two-year recession. This is good news for the rest of the world, which has been growing despite the Eurozone's struggles. 

The July UK service sector report was surprisingly robust, posting one of its strongest readings since the survey began in 2006.


William said...

TrimTabs: Record inflow into U.S. equity funds in July

"Of the $40.3 billion total going into equity funds in July, $31.6 billion went into U.S. equity ETFs, while $8.7 billion flowed into U.S. equity mutual funds, TrimTabs reported.

"The record inflows came a month after investors had dumped bonds at a record pace in June....A record $69.1 billion was pulled out of bond funds in June, followed by an outflow of $21.1 billion in July, according to TrimTabs data.

Still, cash remains king, with the latest data suggesting more of the money that has come out of bonds this summer has gone into cash. In the latest eight weeks ended July 22, $110.9 billion poured into savings deposits, while $32.5 billion flowed into retail money market funds.

The combined inflow into cash of $143.4 billion is nearly three times the $54.1 billion that flowed into all equity mutual funds and ETFs in June and July, TrimTabs said.

Benjamin Cole said...

The PCE inflation index is at 1 percent and falling. So, the Fed is well below even its somewhat low 2 percent inflation target, and economic growth remains weak. I can't see why QE should end now, or maybe even for several years.

Also, it is wrong to think of QE as "doing something" and not doing QE as being neutral.

If the Fed has its polished wing-tipped shoe on the throat of the economy, thus cutting off the monetary air supply, that is "doing something" also.

Many economists, such as David Beckworth in writing in for The National Review, suggest the Fed is now "passively tight."

The problem is, the Fed cannot cut rates. We are in or near ZLB.

So, while QE looks "activist" it is really only enough to prevent the Fed from actually tightening the money supply. Not doing QE would be tightening the money supply. We need that now like we need a Portosan on the front lawn of the White House.

Given the direction of inflation, the Fed may actually be tightening as we speak, even with the current level of QE. We may need to taper up.

Benjamin Cole said...

Unit labor costs in nonfarm businesses fell 4.3 percent in the first quarter of 2013, the combined effect of a 3.8 percent decrease in hourly compensation and the 0.5 percent increase in productivity---the BLS.

If unit labor costs are do we get inflation?

Office rents are soft, industrial rents are soft.

I would say the Fed has the field wide-open for stimulus....