Monday’s post expressed concern about a recent sharp deterioration in business and consumer surveys. The February Philadelphia Fed survey of regional manufacturers, released yesterday, was another shocker, with the expected new orders index plunging into negative territory – a rare occurrence. As the chart below shows, this suggests further weakness in the national ISM survey to be released on 3rd March.

This morning’s “flash” Eurozone purchasing managers’ surveys were more reassuring, however, with the manufacturing new orders index only slightly lower than in January and the services new business index recording a surprise recovery. It could be that the Eurozone surveys are proving slower to pick up emerging economic weakness but it is also possible that the slide in US confidence has been exaggerated by the Fed’s panic rate cuts, which suggested the central bank believed a recession had started.

The Philadelphia Fed survey does not resolve the recession issue. The expected new orders index has fallen below zero on five previous occasions since the survey’s inception in the late 1960s. In four of the five cases a recession followed but in two of these it began more than a year later. In one case – 1995 – the economy skirted recession.

Nor is the survey’s weakness necessarily a signal of further equity price falls ahead. In the five prior instances of expected new orders turning negative, the average change in the S&P 500 index over the subsequent six calendar months was +8.8%. The change was positive in four of the five cases, the exception being 1973 – but this was in the context of the orders index continuing to plunge to a record low of -43.