A few weeks ago, the US Federal Reserve announced an aggressive and arguably controversial extension of their quantitative easing program. Ironically, at the same time that the Fed is embarking on a new round of asset purchases, in the weeks following the announcement, the balance of economic data has been better-than-expected. And while developed markets, including the US, are likely to continue to experience sub-par growth, the most recent economic data suggests that the risks of a double dip recession continue to recede.
The week of the announcement, witnessed several important economic releases, all of which came in much better than anticipated. The week started with a better-than-expected release of the ISM Manufacturing Survey. In particular the New Orders component – which is a useful leading indictor of future economic activity – came in at its strongest level since May. Continuing the trend, the ISM Non-Manufacturing Survey also indicated that the service sector of the economy continues to expand at a healthy pace. And finally, on October 5th, the October Non-farm payroll report indicated that nonfarm payrolls rose by 151,000. While the unemployment level remained stuck at a still high 9.6%, nonfarm payrolls have now expanded by 0.26% year-over-year, the fastest rate of growth since early 2008. While the recovery in the labor market can still be described as anemic and uneven, it is nevertheless a recovery.
Outside the US, there were other recent indications of economic stabilization. In Germany the IFO Business Climate Survey rose to its highest level since 2007. This is particularly encouraging as the IFO Survey is not only a useful leading indicator of German GDP, but also has implications for the broader European recovery. And finally in China, there is further evidence that the government is succeeding in engineering the desired soft landing. The Chinese Purchasing Managers Index (PMI) rose to 58.2 in October, which represents a significant improvement from its summer lows. All in all, while the economic recovery is still fragile in parts of the world, notably the US, on a global basis the balance of recent news points to a recovery, not a relapse.
With the recovery apparently solidifying and the political climate growing increasingly hostile to further Fed stimulus, the odds are that QE2 will be the Fed’s last gambit for a while.
Source for all data: Bloomberg
