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Service sector indices not particularly strong






This morning the market was apparently impressed by the higher-than-expected reading on the ISM service sector composite index (and also impressed by Japan's latest attempt to fight deflation by lowering interest rates further). I don't share those views. I've been following the business activity index, and as the first chart shows, it has not been very strong of late, and came in still weaker today. Last month I thought it was just one of those random variations, but now it looks more like the service sector is just plodding along, not growing by any impressive amount. That view is confirmed by the employment index (third chart), which is just barely above 50—signaling very modest growth in employment, if any.

The prices paid index (second chart), however, continues to come in with an unambiguous result: a clear majority of businesses report paying higher prices. Deflation is not an issue.

In any event, I don't see signs anywhere of a double-dip recession. The economy is not growing very fast (I still think 3-4% growth is likely, even though that represents a very meager recovery), but neither is it deteriorating by any meaningful amount. Importantly, the larger economic backdrop continues to look healthy: commodity prices remain very strong, global trade continues to expand, and emerging market economies are doing very well.

The biggest problems the U.S. economy faces are 1) very misguided fiscal policy ("stimulus" that doesn't stimulate, and which leaves dreadful debt burdens in its wake, plus massive expansions of government regulatory authority which stifle private sector initiative), and 2) very disconcerting monetary policy (desperate attempts on the part of the Fed to pump up the money supply and weaken the public's demand for dollars). If policymakers would only stop trying to "do something," the economy is perfectly capable of mounting a robust recovery on its own. I remain hopeful that this will be one of the big messages that voters send to Washington next month. The traditional entrepreneurial spirits that have given us strong economic growth in the past are being held down by bad policies, but they have not been snuffed out.

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