Thursday, October 4, 2012

Can You Have A Recession With Services Expanding?

Over the last few weeks, NDD and I have looked at the possibility of a recession.  I discussed it here and NDD discussed it here.  Menzie Chen over at Econbrowser weighs in here.  The general consensus is that the US economy is very weak, but there are too many net positives for the economy to enter a recession.  Let's add one more -- services, which account for a large percentage of the economy.  The latest ISM figures show:

"The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. According to the NMI™, 12 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed; however, the majority indicate a slightly more positive perspective on current business conditions." 

Both activity and new orders increased at decent paces.  And, the overall number is strong.  Also consider that 12 sectors are expanding while four are contracting.  And, consider these anecdotal points:

    "Business remains steady — optimistic for good fourth quarter." (Information)
    "Drought is putting pressure on food cost; tourism slowdown over the summer." (Arts, Entertainment & Recreation)
    "Things feel like the economy is moving. More new small business; unemployment declining; stock market up." (Health Care & Social Assistance)
    "Economic outlook is improving, but company is putting a major effort into more cost reductions and reorganization, resulting in more collaboration between procurement and our internal customers." (Professional, Scientific & Technical Services)
    "The general slowdown which began in March showed some reversal in August." (Wholesale Trade)

All of those snippets are positive.  None say the economy is going gang-busters, but all state that things are moving forward.

Let's look at charts of the data:

The overall index has been fluctuating around 55 for the last three years.

Overall business activity has been fluctuating between 55 and 60 for the last few years.

New orders have also been fluctuating between 55 and 60 for the last three years.

I still think we're in a period of weak growth, somewhere between 0%-2%.  I also don't think a quarter of negative growth is improbable.  But, I don't think a recession is in the cards right now.