The US Institute for Supply Management (ISM) manufacturing new orders index – widely followed as an indicator of US / global industrial activity – reached its equal highest level since 2009 in February. This is consistent with the suggestion from global narrow money trends that economic momentum will rise to a peak in spring 2017 before slowing into the second half of the year. The ISM orders index is expected here to fall back over coming months.

Narrow money trends provide a significantly longer lead on future economic activity than the ISM survey. The first chart shows the ISM new orders index and six-month global real narrow money growth pushed forward six months. The strong February ISM reading matches a peak in real money growth in August 2016. Based on this relationship, the ISM orders index may have reached a peak in February and is likely to decline into mid-year.


Three other considerations suggest that ISM strength will fade. First, the February orders surge partly reflected increased inventory building, which is likely to prove temporary. The ISM inventories index rose to its highest level since 2015 last month.

Secondly, consumer spending on goods has slowed, suggesting insufficient final demand to maintain the current pace of orders expansion. Three-month growth of retail sales volume fell to 0.6%, or 2.5% annualised, in January – second chart – while February auto sales were lacklustre. Demand for capital goods is recovering but probably not enough to offset this softness.


Thirdly, ISM strength has not been confirmed by East Asian business surveys, which usually act as a bellwether of global trends. The Federation of Korean Industries February survey, indeed, reported a marked weakening of business expectations, although this may be partly attributable to political and corporate scandals – third chart.


The pattern of recent years has been that periodic slowdowns in the global economy have swiftly led to additional monetary policy stimulus, limiting and eventually reversing any damage to equities and other risk assets. Major central banks, however, may take a tougher line this year, reflecting low unemployment rates, high headline and rising core inflation, and a growing “populist” backlash against low / negative rates and neverending QE.