Economists seem generally unfazed by the drop in ISM’s March non-manufacturing index, with most rationalizing that after some strong gains it was due to ease, and all readings still signal expansion.
Goldman Sachs noted the headline decline “was driven by a sharp drop to 59.7 from 66.9 in the business activity index — the biggest drop since late 2008 — which is the component we have found to be most closely correlated with GDP growth.”
Firm notes it’s “the first meaningful disappointment in a business survey in several months, so it deserves some attention.” Nomura points out that the decline narrows “the general divergence” seen recently “between hard data and survey-based data.”
Our favorite observation following the ISM services report comes from RDQ Economics, aimed at the Fed’s tale on rising commodity prices.
“The broad-based nature of price increases make the Fed’s assertion that commodity price increases are demand driven and have nothing to do with ultra-easy monetary policy nonsensical,” the firm said. To further illustrate the absurdity, roofing shingles were listed in the report among commodities reported “up in price.” Roofing shingle prices “are rising in the U.S. because of demand even though there is very little building going on?” RDQ very appropriately wonders.
Which brings us once again to Chairman Bernanke and his comments last night. Newswires Michael Derby reported that Bernanke said that the rise in global commodity prices — which is all demand driven, mind you — will be transitory and prices “will eventually stabilize.”
If you buy the Fed’s demand-driven thesis, then demand — particularly in Asia and emerging markets — needs to cool off a lot, and cool off quick in order for commodity price gains to prove to be temporary. The necessary sharp pullback in global growth, and particularly in emerging-market growth, is not a widely held view, as far as we’re aware.
The run-up in commodity prices may indeed prove temporary, but only after the Fed finishes with QE II and then begins to signal an interest in drawing down the liquidity it’s poured into the global financial system.