Fed Taper Talk Heats Up as Economy Improves

Stock Market

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Non-manufacturing business conditions in the United States continued to improve in July, according to the latest ISM Report on Business. The Institute for Supply Management reported that its index for the non-manufacturing sector increased 3.8 percentage points on the month to 56 percent, indicating that America’s service economy grew at a faster rate in July than in June.

On a different day, the positive ISM report may have been enough to buoy market optimism and equity prices. But Monday’s markets apparently had bigger fish to fry and declined in midday trading, instead chasing comments made by Dallas Fed President Richard Fisher in a speech he gave in Portland, Oregon. Fisher has often been critical of the U.S. Federal Reserve’s program of quantitative easing, and he pointed out that the Fed is getting closer and closer to tapering asset purchases as economic conditions improve.

With this in mind, positive economic data is a mixed blessing for the equity markets, which, as Fisher said Monday, “have become too accustomed to what some have depicted as a Fed ‘put.’”

The implications of different economic indicators over the past several months have bled together and painted a pretty gray picture of the U.S. economy. The most recent Employment Situation report showed a 0.2 percentage point reduction in the headline unemployment rate to 7.4 percent, which is encouraging. However, the same report showed effectively no change in the number of long-term unemployed Americans.

Gross domestic product grew faster in the second quarter than economists had anticipated, but growth was still relatively anemic, at an annualized rate of 1.7 percent, and followed downwardly revised growth of 1.1 percent in the first quarter. Measures of consumer spending and consumer confidence by Gallup have also come in fairly weak over the past two months.

However, July’s ISM Report of Business was a victory for optimists. The Business Activity Index increased 8.7 percentage points to 60.4 percent, its 48th consecutive month of growth. The New Orders Index increased 6.9 percentage points to 57.7 percent, and while the employment index declined 1.2 percentage points, it still remained positive at 53.2 percent.

Of note to Fed policy: the prices index increased 7.6 percentage points to 60.1 percent, suggesting that there may actually be some inflationary pressure somewhere in the pipeline, something that has been absent in most other measures.

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