Independent monthly business surveys offer the most reliable evidence of the economy’s business cycle position and its short-term growth outlook.

Survey data collected by the U.S. purchasing agents about production, sales, inventories, employment, prices and intangibles, such as business and consumer “sentiment,” are observations that allow estimates of where the economy is and where it might be headed in the months ahead.

That sort of insight can help policy makers to determine the timing and the extent of monetary, fiscal and structural measures to stabilize labor and product markets along a path of steady and noninflationary growth.

Purchasing agents’ business surveys published earlier this month indicate that activity in the U.S. service sector (about 90 percent of the economy) during February marked its 20th month of continuous expansion, with strongly growing new orders, increasing employment, declining price pressures and rising order backlogs.

By contrast, activity in the manufacturing sector was much more subdued. The survey noted a very small activity contraction, falling new orders, rising inventories and, strangely, strongly increasing prices. In the area of foreign trade, export orders rose slowly, but orders of foreign merchandise showed a sharp increase.

Forward momentum could continue

This snapshot view of the U.S. economy suggests high probability of a continuing forward momentum.

But to produce estimates of short- and medium-term economic outlook, one needs to use the hard data on the key drivers of domestic demand (household consumption and private investments) and foreign trade accounts (exports and imports of goods and services).

The most important hard data one needs here are employment, personal income, and credit costs to estimate household consumption and private investments – two components of domestic demand that account for nearly 90 percent of the U.S. economy.

Here is a quick review of those variables.

With a 4.4 percent unemployment rate in February, the U.S. has a fully employment economy. That is a conclusion drawn from empirical evidence that any U.S. unemployment rate of 5 percent or lower is considered full employment.

The growth of after tax and inflation-adjusted personal income (real disposable personal income) slowed down during the second half of last year to 1.3 percent in the fourth quarter but recovered to 1.8 percent in January. That pattern of income growth was closely reflected in a declining growth of household consumption and a clear revival during January.

This means that consumer spending remains very sensitive to changes in real disposable income that are affected by taxes and consumer prices. That also shows the importance of the “affordability” argument prominently featuring in U.S. public opinion polls.

Growth tilted to the downside

Private investments crucially depend on companies’ sales outlook. Businesses decide to expand their capital stock if they need larger production facilities to meet growing demand for their products and services.

The impact of credit costs on business capital spending is not clear. Evidence suggests that credit costs will not determine adjustments of capital stock, but they could influence the speed of that adjustment process.

Conversely, credit costs are an important driver of household consumption and residential investment. Indeed, purchases of consumer durable goods (aka “big ticket items”) and mortgage financing are heavily impacted by financing costs.

The availability and the cost of credit are instruments of monetary policy. They are part of the monetary-fiscal policy mix driving the entire economic activity.

So, what kind of an economic policy mix do we now have in the United States?

On the fiscal side, the position is very clear. With budget deficits of about 8 percent of GDP and public debt of 126 percent of GDP, the U.S. fiscal policy is very expansionary.

That limits the scope for monetary easing. Inflation is another binding constraint to monetary policy. The core inflation rate (the personal consumption expenditure index less food and energy) in January accelerated to an annual rate of 3.1 percent – considerably above the Federal Reserve’s official target of 2 percent.

And inflation could worsen in the months ahead because of trade tariffs and sharply rising energy costs. Import prices in February increased 1.3 percent, after a 0.6 percent increase in January. Similarly, energy services (electricity and gas services) in February were rising at an annual rate of 6.3 percent.

The risks to the U.S. economic growth are tilted to the downside. But if Middle East hostilities are rapidly contained and prolonged energy shortages avoided, growth this year could be kept along the path of the noninflationary potential between 1.5 and 2.0 percent.