A rebound in US manufacturing has handed ammunition to those at the Federal Reserve uneasy about further quantitative easing (QE), as the central bank starts its most important meeting since the depths of the crisis.
Ben Bernanke, Federal Reserve chairman
Ben Bernanke, the Fed’s chairman, has signalled to Wall Street that a second dose of QE is likely to be announced on Wednesday in a bid to fire up America’s economic recovery.
While the policy commands broad support among most on the Fed’s Open Market Committee (FOMC), some have voiced doubts about how much extra QE the economy needs. A stronger reading from the Institute for Supply Management’s index of manufacturing, which showed that orders this month at their strongest level since May, will not have quietened that unease.
“On the whole the manufacturing sector appears to have survived the slowdown in demand seen over the summer and is once again starting to recover,” according to economists at HSBC.
However, the final day of data before the FOMC meeting also showed that the income of US consumers dropped in September for the first time in more than a year.
A decision to opt for more QE – or printing money – will prove controversial, and comes as the prospect of the Bank of England doing the same on Thursday recedes.
In the UK, a leading survey showed manufacturers enjoyed an unexpectedly good October. The Markit/CIPS manufacturing purchasing managers’ index (PMI) improved to a reading of 54.9 from September’s 10-month low of 53.5, representing the index’s first rise since May and confounding economists’ predictions of a drop to 53.1.
Production growth accelerated for the first time in seven months, supported by faster inflows of new business – in particular, a surge in export orders which eased concerns after demand from abroad contracted in September.
In addition, the rate of job creation was at its strongest since June, raising hopes that the private sector can offset public sector job losses.
On the downside, manufacturers appeared to foresee uncomfortable rises in the costs of raw materials, as they increased stock levels at the fastest pace in the survey’s 18 years.
The generally encouraging data represented the “final nail in the coffin” for the likelihood the Bank’s policymakers will this week expand the £200bn QE programme, according to Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club.
By Richard Blackden, and Emma Rowley
Published: 7:57PM GMT 01 Nov 2010