A post in July drew attention to a reacceleration of G7 real narrow money, M1, suggesting that this would be followed by a rebound in global industrial momentum at the end of 2010 after an extended “soft patch”. This revival, it was argued, would be foreshadowed by an improvement in leading indicators in the autumn.

An update last week noted that the pick-up in real M1 had been sustained while the decline in the OECD’s G7 leading index was losing momentum, consistent with an imminent bottom.

Business surveys this week provide further evidence that industrial weakness may be abating. In the US, the future new orders balance in the Philadelphia manufacturing survey jumped to a five-month high in October; this usually leads the national Institute for Supply Management new orders index – see first chart. The Eurozone “flash” purchasing managers survey for October also reported a rise in manufacturing new orders while, in the UK, CBI industrial output expectations strengthened significantly.

The improvement in surveys tallies with a rise in the net proportion of equity analysts upgrading forecasts for company earnings (i.e. the earnings revisions ratio) – second chart.

Against this encouraging backdrop, the Federal Reserve and its local incarnation, the Bank of England, are threatening to lob a monkey-wrench into the economic machinery by embarking on substantial “QE2” asset purchases.  Since growth is not currently constrained by a shortage of money, such an initiative would probably feed directly into prices – either of assets or goods and services.

A key risk is that additional liquidity fuels further commodity price gains, squeezing real incomes in consuming countries and forcing monetary policy tightening in overheating emerging economies; China's "surprise" interest rate rise this week may be a harbinger. Such adverse effects could, in the worst case, abort the incipient global industrial pick-up.

Similarities may be drawn with late 2007, when "pre-emptive" Fed interest rate cuts sent oil prices through the roof, thereby nailing down the coffin lid of the US consumer and removing any remaining possibility of the economy avoiding a recession.