Implications: The ISM service report exploded higher in August, beating the forecast from all of the 84 economics groups that made a prediction and coming in at the highest level since December 2005. The business activity index, – which has a stronger correlation with economic growth than the overall index – boomed to 62.2, while the new orders index also showed notable growth to 60.5. Even the employment index showed strong growth to 57.0. We expect this measure to remain at elevated levels in the coming months as companies hire more in response to better economic growth (which the business activity index is showing). On the inflation front, the prices paid index fell to 53.4 in August from 60.1 in July. Given loose monetary policy, we expect this measure to move upward over the coming year. In other recent news, Americans bought cars and light trucks at a 16.1 million annual rate in August, an increase of 1.8% over July, 11.1% versus a year ago, and the fastest pace since September 2007. Pessimistic analysts have been touting the end of the payroll tax cut and the federal spending sequester as reasons to expect weaker economic growth. But the truth, from looking at the data so far, is little to no significant impact from these events on the consumer or economy, and we do not think there will be. What we have here is a Plow Horse Economy that looks like it may be starting to trot.
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