US business surveys weaken on schedule
Thursday, August 19, 2010 at 05:13PM
Simon Ward

Posts earlier in the year argued that global economic momentum would fade in the second half in lagged response to narrow money supply weakness in late 2009 and early 2010. A slowdown would also be consistent with the typical cyclical pattern, involving strong stocks-led growth in the first year of a recovery followed by a "resting phase" before a sustained upswing driven by final demand.

The US Institute for Supply Management (ISM) manufacturing new orders index is a useful summary measure of global industrial momentum. A chart presented in a post in June suggested that this index, then at a recovery peak of 66, would fall back to the break-even 50 level over the summer. An update is provided in the first chart below – ISM new orders dropped to 53 in July and this week's regional manufacturing surveys by the New York and Philadelphia Federal Reserve Banks suggest a further decline in August.

If the index continues to follow the "five-cycle average", it may stabilise at around the 50 level before restrengthening in early 2011. It would need to fall to 45 or below to signal a recession. Sub-45 readings have historically been preceded by a significant contraction in US real narrow money but this has expanded recently – second chart. A further indication that the ISM measure may be approaching a trough is a small rise this month in the Philadephia Fed future orders index (in contrast to the decline its current orders measure) – third chart.



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