Implications: The headline number for the ISM services index disappointed this morning, falling short of consensus expectations and dipping to the lowest level in almost two years. At 52, the headline index still shows expansion, but a gradual one. However, we think the headline number is highly misleading. The details of the report show the service sector is re-accelerating. The business activity index, which has a stronger correlation with real GDP growth than the overall index, rebounded to 56.2 in November from 53.8. The new orders index increased as well. As we've said before, the ISM surveys can sometimes reflect the vagaries of business sentiment rather than actual levels of output, and this is likely to be the case with the drop in the headline report for November, when fears about Europe were rampant. The employment sub-index dropped below 50, but since we already have payroll data from November, this is not relevant information. On the inflation front, the prices paid index rose to 62.5 after dipping down to 57.1 last month. Inflation pressures are building with each day that the Federal Reserve clings to loose monetary policy. More monetary action and quantitative easing would be a mistake and would make the inflation problem worse.
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