Purchasing managers' new orders indices support hopes of a strong recovery in G7 industrial activity during the second half – see first chart. This pick-up, however, partly reflects temporary factors such as slower destocking and "cash for clunkers" schemes. Sustained growth will require companies to move out of retrenchment mode and in particular to resume hiring, thereby providing income support for increased consumer spending

Other components of the latest surveys indicate that companies are reacting cautiously to unexpected strength in incoming demand. For example, while the US Institute for Supply Management (ISM) new orders index reached a five-year high last month, employment, inventories and import indices remain below their historical average readings – second chart.

One scenario is that orders strength will fade rapidly, validating firms' scepticism. This is unlikely: stocks cycle upswings typically last 12-18 months and the current boost should be unusually large given record destocking in late 2008 and early 2009.

Alternatively, firms may wait for higher orders to be sustained for a couple more months before shifting into expansionary mode. This is plausible and would be consistent with behaviour in previous cycles. However, companies may be more risk-averse given recent traumas while restricted credit availability may limit their ability to ramp up production and hiring.

This raises the possibility of a third scenario, in which order flows remain strong but the supply-side response is less dynamic than in prior upswings. As well as a less steep recovery trajectory, this would imply an earlier emergence of supply constraints and upward pressure on prices than suggested by consensus analysis based on highly-uncertain "output gap" estimates.

An indirect measure of US supply pressures is the ISM vendor deliveries index – higher values indicate more firms reporting delivery delays. Interestingly, this rose sharply in August to its highest level since May 2006. Historically, large increases have often preceded rises in US official interest rates, although the index would need to climb significantly further to reach its level before the Fed last began to tighten in June 2004 – third chart.