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Service sector report unimpressive




The November ISM service sector report was lackluster. It paints a picture of an economy that is just muddling along. There are sectors of the economy that are doing much better, however, which are not reflected in this report: mining and technology, for example. But overall the economy is growing only modestly faster than the growth of population. 


Despite lackluster growth in the service sector, and despite the economy's huge supply of unused physical and human resource capacity, more businesses report paying higher prices than report paying lower prices. This has been a persistent theme for well over a year now, and I believe it is a testament to a) the fact that monetary policy is accommodative, and b) the Phillips Curve theory of inflation is fundamentally flawed. If anything, this tells us that the risk of a monetary policy error (e.g., the Fed not having eased enough to promote a recovery) is very small at this point.


A few months ago this chart was upbeat, but now it is not. It might be reflecting the onset of a double-dip recession, but I think we would need to see meaningful deterioration in a variety of other indicators before getting worried. Consider all the positives that are still extant: weekly unemployment claims are still declining, private sector jobs are still growing, manufacturing and capital indicators are still positive, the yield curve is still steep, auto sales are strong, commodity prices are still quite elevated, industrial production is still expanding, capital spending is still strong, and corporate profits are very strong. Plus, there are increasing signs that the Eurozone is not going to give up without a fight: Italian 2-yr yields are down over 200 bps in the last 10 days, hitting 5.6% today; that's still quite elevated from an historical perspective, but it is meaningfully below the 7% level which many consider to be critical.

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