In a blog post I wrote in June 2012 (“Under the Hood of the New Manufacturing Report”) I wrote about the difference between the New Orders component and the Inventory component of the Manufacturing PMI, and how it tends to lead the overall PMI by about three months. Today, I want to look at how this indicator has performed since then, and what it is signaling for the near future.
At the time the previous post was written, the “New Orders minus Inventory” indicator was suggesting the Manufacturing PMI would rise over the following three months, as indicated in the chart by the rising blue bars from June through September of last year. That however was not the case, as the PMI actually declined from 52.5 in May to 50.7 in August. In this indicator’s defense, other factors may have played a role in the result. For one, the n-th European scare was taking the stage at the time, accompanied by bear market-size declines in many European stock indices. That may very well have invalidated the message given by the “New Orders minus Inventory” indicator in the previous months by putting a temporary lid on economic activity.
Following this temporary malfunctioning, the indicator resumed its leading role in September, by capturing the renewed weakness in the PMI going into November, as well as the recovery through February, when the PMI reached the current level of 54.2. Going forward, the indicator is projecting a small incremental advance in March, followed by some weakness in April and a subsequent recovery to the previous level in May. Pending another major shock with the potential to change the economic picture, the current trend points toward manufacturing activity holding (more or less) steady at the current level of moderate expansion.
As always, only time will tell.