US Economy Update: Still No QE3

The recent string of US economic data does not change our view that renewed asset purchases by the Federal Reserve as early as next month as some have suggested  remains unlikely.  The data does warn that Q1 GDP is likely to be revised lower, toward almost half of the Q4 '11 3.0% pace.

The data suggests the economy is likely back in the middle of the 2-3% range that the economy has averaged since the recovery began and is consistent with the Fed's base line forecasts.  

Today's industrial production news is consistent with that.  Output was revised out of March and put into April.  So, for example, April industrial production came in at 1.1%, twice what the market expected, but the March series was revised from flat to -0.6%.  Manufacturing rose 0.6% in April, about half of which was accounted for by the auto sector, but the March contraction was revised to -0.5% from -0.2%.  

Note too that capacity utilization rose to 79.2% from 78.4% in March and is the highest since 2008.  It is not inflationary, but one of the pre-conditions for QE would seem to be a new threat of deflation, and it simply is not there,  

Housing starts rose in April and the March time series was revised higher.  At over 700k, this is the upper end of housing starts and gives support to the idea that some kind of modest recovery is at hand.  Indeed, it is consistent with earlier reports we noted pointing to a decline in vacancies in both multifamily and single family units.  In addition, yesterday's report showed home builders sentiment is at recovery highs.  

In addition, we have noted and repeat here, that the drop in gasoline prices will help support spending and the recent senior loan officer survey showed the strongest demand for credit from households and businesses in nearly a decade.  

The market debate over QE is likely to continue.  It does seem reasonable that if the head winds from Europe become more powerful, the negative impact on the US economy can increase the odds of QE.  However, the euro area GDP was expected to contract in Q1 and instead it was flat.  This would seem to imply the headwind is not strong enough yet.  Plus the flight to Treasuries as a safe haven have helped keep yields down, arguably lower than they otherwise would be.

On balance, given the data and recent comments by the US Troika BYD (Bernanke, Yellen and Dudley), QE3 continues not to look like the best case scenario for next month's FOMC meeting.