US triple-dipping

Last week’s GDP figures in the US confirmed the momentum in the US economy’s recovery is slowing as the impetus from stimulus packages and government largesse fades and the true pulse of the economy becomes evident. This trend appears set to continue if last night’s report on the non-manufacturing sector from the Institute of Supply Management is any indication of what we can expect. The latest reading of the diffusion index, where a reading below 50 indicates a contraction in activity while a reading above 50 indicates expansion, showed that the pace of expansion slowed noticeably in April as the index fell from 57.3 to 52.8 and is now well off its high from February of 59.7:


Incidentally the latest 2 month fall is the worst back to back performance for the non-manufacturing ISM since the collapse of Lehman Brothers where the index slumped from 49.8 to 37.6. While the ISM’s manufacturing index still remains high, printing above 60 for the 4th straight month a couple of nights ago it too appears to be rolling over. This slowdown in the pace of manufacturing expansion can also be seen in some of the Fed regional manufacturing surveys:


With this slowdown, a housing market that is taking another leg down, employment growth that also appears to be slowing and a weak consumer sector, it is no surprise that Bernanke and the Fed are persisting with QE2:


The likelihood of QE3, should the slowdown in the US economy persist, still seems remote, even if the recent pull back in commodity prices were to take some of the heat out of recent inflationary pressures. And, according to one of my favourite economic commentators, John Mauldin, rents make up 23% of total inflation and 40% of core inflation. With more and more Americans shunning home ownership in favour of renting after the collapse in housing prices, rents are forecast to rise 10% this year which would have a significant impact on both headline and core inflation. However, while the chances of QE3 seem remote, what other choice does the Fed have when the government is staring down the path of austerity as the economy slows?

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Comments

  1. Unfortuately QE 3, 4, 5 etc wont stop until China lets its currency appreciate to where it should be. My belief is the whole freaking world is out of wack because the 2 countries (US and China) are at a economic and currency wars with each other. Australia, Canada, UK, Europe, Asia are caught in the middle. Both are as bad as each other. They are both printing money at a astounding rate and it will hurt everyone in the end.

  2. I don’t understand why people assume that Bernanke plans to cease QE after this round. My interpretation of his statements at his recent press conference is that he plans to continue with QE2 as planned but will do whatever is necessary to promote growth beyond that ie: keep rates low and indulge in more QE as required (I’m assuming here that it will be ‘required’). For some reason many commentators have interpreted his comments to mean that QE2 is proceeding as planned and then that’s it.

  3. Regurgitated this below from the latest report by The International Forecaster.

    China started to offload its holdings of U.S. Treasuries from last October, from $1.1753 trillion to $1.1541 trillion by the end of Feb 2011.

    Just as a comparison, back in February 2001, according to historical data reported by the Treasury, the Chinese owned only $63.7 billion in U.S. debt.

    With China offloading treasuries, the U.S. Banks are buying Treasuries at the fastest pace in nine months as lenders retreat to the safety of U.S. government debt with the economy expanding slower than forecast and loan demand dormant. Commercial banks bought $65 billion of government debt in the past seven weeks, as their total holdings reached $1.68 trillion.

    Nearly one-fifth of full-time employed Americans have raided retirement accounts in the past year. Though 80 percent of full-time workers didn’t dip into retirement funds, far too many consumers are ill-prepared for emergencies.