Failure to Launch
The economic data reinforces the image of an economy that is expanding but unable to achieve sufficient momentum for real liftoff.
- The week featured three pieces of good news:
- New orders excluding the volatile transportation sector rose 0.9 percent in August, suggesting continued business capital expenditures that are the key to recovery.
- The National Association of Realtors pending home sales index – a forward-looking indicator of the housing market – was up 4.3 percent in August, the second consecutive monthly increase. Drag from the housing sector is diminishing.
- The Institute for Supply Management’s service index was up to 52.8 in September. Any reading above 50 indicates expansion, so both the overall reading and the employment index (50.2) showed strength.
- It also featured a sobering weak data point:
- The ADP Employment report – released today – shows non-farm, private jobs down by 39,000 in September. Importantly, the dominant job losses were located in small, goods-producing firms, which were down 20,000 jobs.
In light of the indicators of sustained, if sluggish, expansion the comments by Fed officials suggesting an aggressive return to quantitative easing seem premature – if not downright panicky.
- The Fed should not tighten, but should save any policy bullets it has for the event of a double dip.
- The policy baton has been passed to fiscal policy, which must shift to a pro-growth mix of low taxes and restrained government spending.
The Bottom Line: Friday’s jobs report looms as the key report card on the near-term expansion. Look for modest job growth – 50,000 to 80,000 new jobs – and hope that Congress will absorb the need for quick resolution of the tax uncertainty facing the private sector.