Tuesday, August 5, 2014

Service sector outlook solid

As was the case with last Friday's ISM manufacturing report, today's July service sector report was solid. Fortunately, unlike the manufacturing report, Europe's service sector outlook is also positive. Both economies are growing and improving, and that's very good news.

The July Business Activity subindex came in just shy of a post-recession high.

The Prices Paid subindex shows little or no trace of the dreaded deflation that so many seem to worry about.

The Employment subindex was also just shy of a post-recession high, and suggests that businesses are feeling more confident about the future.

The overall Service Sector index handily beat expectations (58.7 vs. 56.5), and hit a new post-recession high. Happily, the Eurozone version of this index showed continued improvement since the end of the 2012-13 Eurozone recession.

All of this adds to the already-long list of indicators pointing to continued growth and forward economic momentum. The only mystery is why the Fed feels that zero short-term interest rates are necessary to sustain and foster the growth of the U.S. economy. These graphs almost certainly do not paint a picture of an anemic recovery.

Expect increasing dissension among FOMC members, and an earlier-than-expected move to raise short-term interest rates. This may prove briefly unsettling to markets, but it would be the right thing to do, and as such it would be non-threatening.


William said...

Fed's Fisher: More data like July ISM service index will prompt rate move


Benjamin Cole said...

FOMC member Richard Fisher is a monomaniac inflation-phobiac. Egads, he is an active menace to American prosperity.
Robust, growing economies generate some bottlenecks and price pressures, that the price signal usually resolves. You can avoid inflation by choking off prosperity through tight money. I prefer prosperity.

The Fed is tightening now, cutting QE. The ECB has been shrinking its balance sheet, a sort of reverse QE.

Thus two major central banks are tightening, though both have spent the last five years below inflation targets.

The BoJ proved a central bank can hit zero inflation---you just have to accept chronic depreciation in property and equity markets and very slow growth.

Australia's central bank seems to do well with a 2-3 percent inflation band as target. China's has a 4 percent ceiling.

I can think of no modern major economy that prospered in a zero inflation environment, or even that prospered when a central bank had a single mandate.

The USA economy did well from 1982 to 2007 with various moderate rates of inflation. Greenspan did a good job.

When the Fed over-tightened in 2008...

The Fed may be too tight--

Benjamin Cole said...

Okay one more point...the BoJ had interest rates near zero for 20 years yet the yen kept appreciating. The point is that interest rates alone do not tell you what the stance of monetary policy. You must look at the totality.

Anonymous said...

What a queer virtual coin I have. On one side is an image of Ben Cohen and the other side I there is an image of Pete Schiff.


sgt.red.blue.red said...


I am uncertain as to the point you are making, but the Federal Reserve tightened from June 2004 - June 2006. They loosened 2007-2008.

Historical Changes of the Target Federal Funds and Discount Rates

Benjamin Cole said...

Sgt. Red:

Sometimes I don't know the point I am making either.

The Fed was too late and too little in cutting rates in 2008, and only went to QE later.

Anyway, you cannot tell whether a central bank is "tight" or "loose" just by looking at rates.

If that were true, you would conclude the Bank of Japan was looser than a dockside trollop 1992-2012, when they had rates near zero. But the yen appreciated.

I think that is what causes such misunderstanding among some. They keep thinking the Fed is "easy" as rates are low. But look inflation. It has been dead. Look at real growth. It is slow.

You could say the ECB has been "easy." They have been so easy that Europe now has an inflation rate of 0.5 percent.

In the past, any large economy that had an inflation rate of 0.5 percent would be held up as an example of iron-willed monetary rectitude and rigor. Now they say the ECB is "easy."

Joseph C: I will have to start reading this Peter Schiff guy. I just started writing for Seeking Alpha, so we will see if I can get some pocket money...

Anonymous said...

We'll miss you.