Today’s news is all about cheerful data releases. Chinese growth accelerated to 7.9% after 7 consecutive quarters of deceleration. Industrial production growth and retail sales growth both increased on a YOY basis for the fourth straight month. Fixed asset investment growth remained around its recent relatively low level at 20.6% YTD/Y. In the US, although the Philadelphia Fed manufacturing index fell back into negative territory, housing starts rose relatively strongly, beating expectations and attaining another post-crisis high and weekly initial jobless claims printed a new post-crisis low.
The Fed statement says that asset purchases will continue until the employment outlook has improved “substantially”. How can we work out whether this is happening? In his public statements, Bernanke has made clear that the idea here was to look at a range of indicators and make a qualitative assessment of the outlook; the most reasonable way to model this, it seems to me, is to create a simple composite index of key employment indicators, and take it that the probability of an end to asset purchases increases as the index improves. That should not take me too long.
Republicans in Congress have reportedly discussed the idea of a short-term deal on the debt ceiling. That would be consistent with my analysis of their objectives, which included: raise debt ceiling without debacle. This idea strikes me as a plan to turn a relatively weak hand into a stronger one. In any particular debt-ceiling negotiation, the Republicans will not have a stronger hand than they do in the present one; but if they raise the debt ceiling for three months at a time, as has been suggested, then they have a proper threat: that they will make this an issue again and again unless BO does a deal with them on spending. If that happened, Mr. Obama would be unable to focus properly on his other objectives, because he would be at risk of being painted as “sleepwalking into disaster”, or some such thing, for not focusing on the ceiling again and again. This Republican idea, if adopted, would also be a plan to separate the three issues that make up the current debate — the debt ceiling (15 Feb), the sequester (1 Mar) and the continuing resolutions (27 Mar).
It strikes me that the Republicans still do not have the stronger hand, however. If they insist on a debt-ceiling confrontation every three months, then Mr. Obama can paint them as economically irresponsible every three months. But the Republican threat of inconvenience would be credible. This alters my analysis a little. Originally I said that I expected the debt ceiling to be increased and for spending cuts to happen to an extent somewhat less than the average of the cuts favoured by Mr. Obama and the Republicans respectively. The mooted Republican manoeuvre, if it happens, would slightly increase the strength of the Republican position and thus move the likely extent of the cuts in the direction of that average.