Monday, 17 December 2012

Economy shows improvement as Fed announces more stimulus

Preliminary readings from purchasing managers' surveys for December released last week showed improvement in the global economy.

In the United States, Markit's US manufacturing PMI jumped to 54.2 in December from 52.8 in November.

In the euro area, Markit's composite index rose to 47.3 in December from 46.5 in November. The services index rose to 47.8 from 46.7 while the manufacturing index rose to 46.3 from 46.2.

HSBC's China manufacturing PMI rose to 50.9 in December from 50.5 in November.

These preliminary readings suggest that the improvement we saw in November (see “Global economy shows acceleration in November”) has been sustained.

However, in his latest commentary, John Hussman maintains his pessimistic view of the global economy.

Strong leading indicators such as the CFNAI and the Philly Fed Index have been weak for many months, and the deterioration in new orders has moved from a slowing of growth to outright contraction in recent months. In the order of events, a slowing in real sales, personal income, and personal consumption expenditure typically follows – these are called coincident indicators. These growth rates generally only weaken materially once a recession is in progress, and reach their highest correlation with recession about 6-months into the downturn. That’s what we’ve begun to observe over the past few months, adding to our impression that the U.S. joined a global (developed economy) recession during the third quarter of this year.

Despite the improvement seen from the purchasing managers' surveys, the Federal Reserve announced yet more monetary stimulus at its monetary policy meeting last week.

Hussman, who has been critical of Fed policies in recent years, says in his latest commentary that monetary policy “has become a roach motel – easy enough to get into, but impossible to exit”. He said that if the economy eventually strengthens at some point past 2013, “the Fed would have to sell nearly $3 trillion” of US debt, and such a level of monetary tightening is likely to be disruptive.

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