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Investing Specialists

QE or Not QE, That Is the Question

This week's indicators showed steady improvement. Will more quantitative easing help the situation?

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Other than durable goods orders, this week's pack of economic indicators was positive and consistent with a slowly improving economy driven by better consumer spending. However, this week's indicators were largely ignored as investors focused on new guesses about the timing and the magnitude of the Fed's quantitative easing program, a novel attempt to reduce long-term interest rates.

Fears that the easing may not be as big as some hoped drove the market down early in the week. The 2.0% real GDP growth rate for the September quarter, announced on Friday, was certainly a positive, though the market was less than excited about this piece of data. Even more impressive, consumer spending increased 2.6% in the quarter compared to 2.2% in the prior quarter, continuing an accelerating quarterly trend.

Given my fundamental belief that it is the consumer that is the ultimate driver of economic activity, this was clearly the best news of the week. On the manufacturing side, durable goods orders, stripping out aircraft data, were disappointing. Softening the blow a bit was a highly positive regional purchasing managers' report for Chicago that showed this key metric improving substantially from the previous month. Though not terribly meaningful, both new and existing home sales were better than expected, but still at highly depressed levels. Initial unemployment claims also fell an additional 21,000 after a meaningful decline the previous week, inspiring some hope that October's jobs report will look a little better.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.