Unconventional Wisdom - Misleading indicators :: Macquarie Research

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Unconventional Wisdom
Misleading indicators
Event
 The US ISM survey for June surprised all forecasters by rising.
Impact
 Before 2010 there were reliable relationships between a number of indicators
and the ISM survey. But these relationships broke down last year and a
repeat in 2011 looks likely.
 This is a warning against jumping to conclusions about an economy without
considering a broad range of data.
 The key issue now is to decide which of the indicators is giving the correct
signal. As long as the easing of US monetary conditions persists it is more
likely that the stronger data will be a better guide.
Analysis
 One of the more commonly used leading indicators is the difference between
the orders index and the inventories index in the US ISM survey. This
difference proved its worth over many years as a guide to likely trends in the
headline ISM index. Since this index is viewed as a proxy for the broader US
economy, changes in the orders/inventories relationship is a useful tool for
forecasters.
 Or at least it used to be. Up until 2009 the relationship worked quite well.