| From Briefing: Economic Tea Leaves : Last week, we argued in a Story Stock following the Durable Orders report that the lack of a rebound in business investment was likely to restrain the economic recovery. As with all economic forecasts, however, this one is subject to being, well, just plain wrong. So it's important not just to offer the forecast, but to lay out some guideposts which will help you to judge how well the forecast is playing out. Watching capital goods orders numbers in the aforementioned Durable Orders report is of course one important measure. But in order to be as forward-looking as possible, we should focus on purchasing managers' reports. The ISM index is the king of such reports, though regional indexes such as the Philadelphia Fed and Chicago purchasing managers index can provide early clues regarding the ISM number. If the current rebound represents more than just a brief replenishment of inventories, we should see both the overall manufacturing indexes and the new order subcomponent indexes at least hold current levels in the coming two months. If we make it through the April and May reports without any deterioration or, better yet, with actual improvement in these reports, the probability that final demand is strong enough to sustain a healthy expansion will increase significantly. If, on the other hand, those indexes reverse course in the next two months and head back toward the 50% breakeven level, our thesis that a sluggish recovery is likely due to weak business investment will be strengthened. Understanding why these reports are key is quite simple: they are the first manufacturing reports released each month, and they include forward looking components such as orders and delivery lead times. It is likely that these indicators will tell us about business investment trends before we see those trends directly. The Chicago index will be released tomorrow at 10 ET; the national ISM index on Wednesday at 10 ET. See Briefing.com's Economic Calendar for forecasts and links to commentary. - Greg Jones, Briefing.com |
