Recent US economic weakness was predicted by a significant slowdown in real narrow money in late 2011 / early 2012 – see March post. Some series have been notably soft – gross domestic income (an alternative GDP gauge) rose by only 0.1% in the second quarter, the household survey jobs measure has been stagnant since early 2012, non-defence capital goods orders fell sharply in June and July, while industrial output tumbled 1.2% in August (of which 0.3% is attributed to the impact of Hurricane Isaac).
Such news has given fresh hope to stale bears such as the Economic Cycle Research Institute (ECRI), which claims that further weakness in upcoming reports together with downward revisions to earlier data will cause the National Bureau of Economic Research (NBER) cycle-dating committee to pronounce that a recession began around mid-year. (This would, however, invalidate ECRI’s September 2011 call that a recession was then imminent.)
While not impossible, such a development is judged here to be unlikely. Real narrow money slowed but never contracted, as it did before 10 of the 11 NBER-defined recessions since World War 2 – see previous post. Its six-month growth rate, moreover, bottomed in May and moved up over June-August – see first chart. Allowing for the normal half-year lead, this suggests that industrial output momentum will trough in November and recover into 2013.
Such a scenario would imply an upturn in the key ISM manufacturing new orders index from a bottom reached over August-October. An improvement is suggested by a sharp recovery in equity analysts’ earnings revisions in September: the “revisions ratio”, i.e. net forecast upgrades as a proportion of the number of earnings estimates, correlates with ISM new orders – second chart.
With real money growth already reviving, last week’s launch of QE3 was unjustified on monetary / economic grounds – except perhaps as a pre-emptive strike against the (unlikely) scenario that Congress fails to mitigate planned fiscal tightening after the November elections. It may even prove counterproductive – additional liquidity may boost commodity prices and inflation, thereby neutralising or outweighing the real impact of any further pick-up in nominal money expansion resulting from the action.