Monday, November 1, 2010

Comments on Purchasing Managers’ Index (PMI) for October - Massive QE2 Might Not Be Needed

Dr. David Krause, AIM program director commented on today's PMI, "The composite Purchasing Managers’ Index from the Institute for Supply Management (ISM) came in at 56.9 for October, as compared to 54.4 for September.  According to the ISM’s internal estimates, the latest PMI reading if sustained, would be consistent with 5% inflation-adjusted GDP growth." 

"Manufacturing in the U.S. remains the leader in the economic recovery," according to Dr. Krause. "The orders component of the survey jumped nearly 8 points while the production component surged 6 points. The “double-dip recession” talk during the summer seems to have ended and the fourth quarter is off to a strong start."

Dr. Krause continued, "This was a positive report today. Construction spending for September rose an unexpected 0.5%.  Private residential construction spending expanded 1.8% (a change from the past several years), private nonresidential spending retreated 1.6%, and public construction expenditures grew 1.3%. It appears that the stimulus spending might finally be hitting! Because these results were not included in the Q3 GDP report, it is possible that we might see an upward revision of the 2% Q3 growth number."

"It was reported today that prices were higher according to the ISM," said Krause. The Prices Paid component increased to 71, which is the 16th consecutive month the Prices Index has registered above 50 percent. As the graph shows, the ISM price index is leading the CPI."

"While 49 percent of respondents reported paying higher prices and 7 percent reported paying lower prices, 44 percent of supply executives reported paying the same prices as in September. A Prices Index above 49.3 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. Dr. Krause added, "This raises the question: Where’s the deflation? The timing of the higher ISM prices - right before this week's Fed meeting - is quite interesting. Is QE2 really needed to thwart deflation? The Fed needs to be careful that it doesn't let the inflation genie out of the bottle, because it might be hard to put it back in!"

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