Monday, June 20, 2011

QE2 and the Economy

QE2 clearly impacted asset prices, but how was the actual economy affected? 

It should be noted that the recovery had basically lost all momentum in the summer of 2010 and that claims that the economy was "already on the road to recovery" before QE2 seem questionable, especially given the impact QE2 seemed to have on asset markets.

Starting with employment:


Employment based on the Establishment Survey (the survey used to measure month to month changes in employment) clearly did better during the "QE2 period" than during the period before QE2. If employment growth continues at a 150,000+ pace over the next couple months this may just be momentum but if it remains weak (and I predict it will) it seems pretty clear QE2 positively affected employment growth.

The Household Survey (The survey used to measure unemployment) basically gives the same result. Simply put, the only time we've had adequate employment growth since the recession was during the period of QE2.

Since unemployment claims are measured on a weekly basis they provide a somewhat clearer picture of the impact of QE2 on employment. Unemployment claims sharply refute the claim that things were improving without QE2 (notice the "flatness" of claims from late 2009 to mid 2010) or that QE2 didn't help stimulate aggregate demand. This, along with the other employment data seem to strongly suggest QE2 positively affected the employment situation.

It's much harder to argue the turnaround in consumer credit was the continuation of the recovery before QE2. Consumer credit clearly fell until QE2 was hinted at and it started rising steadily immediately afterwards.

Both ISM surveys give the same basic result; the economy slowly gained momentum from late 2008 to early 2010 when it began to stall until QE2 began.

Industrial production is somewhat less clear, but it too seems to have slowed to a crawl in 2010 until a few months after QE2 began. It should once again be noted that economic expectations fell off a cliff before QE2 (very similar to the way they have today), so even a continuation of the previous trend is a success of some kind.

At no point since the recession did retail and auto sales grow so consistently and so strongly than they did during the "QE2 period". Also note the drop-off since QE2 effectively ended.
It will be interesting to see how data turns out the next few months. The weaker it is, the stronger the evidence that QE2 was effective. 

In summary : The evidence that QE2 worked is enormous, but it wasn't enough. If the fed engages in further asset purchases, it should include an explicit target (inflation, NGDP) and should adjust their size according to changes in the performance of the economy.

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