Economic Recovery Checklist – III
The interest rate spread, which is one of the ten components of the Index of Leading Economic Indicators (LEI), was the subject of the Economic Recovery Checklist II (published on March 9, 2009). The Supplier Deliveries Index, which is a part of the ISM manufacturing survey and a component of the LEI, is the focus of today’s comment. In addition to the Supplier Deliveries Index, the index tracking new orders and the composite index of purchasing managers (PMI) are also evaluated in a race to identify which indicator comes out ahead as the most reliable leading indicator. Charts 1-3 illustrate the entire history of Supplier Deliveries Index, News Orders Index, and the PMI of the ISM manufacturing survey.
The Supplier Deliveries Index tracks the delivery performance of suppliers to manufacturing firms. Readings exceeding 50.0 signify slower deliveries of supplies reflecting growing demand and bottlenecks in the supply chain. The Purchasing Managers’ Index is a weighted average of production, new orders, supplier deliveries, inventories, and employment indexes.
Table 1 lists whether each of the three indexes leads or lags the business cycle in the post-war period. Each of the three indexes establishes cycle lows prior to the end of recession, with a few exceptions when they were coincident or lagged the turning point of a business cycle. Based on the average/median number of months that lapsed between a cycle low of the index and the trough of the business cycle (see table 1), the Supplier Deliveries Index wins the race with the New Orders Index coming in at a close second. The PMI is a composite index which includes the Supplier Deliveries Index and the New Orders Index, which makes it somewhat redundant.
The ISM survey for March is scheduled to be published on April 1. The consensus forecast is 36.0 for the PMI from 35.8 in February. The details of the survey will be useful to identify the standing of the Supplier Deliveries Index and the New Orders Index. Both of these indexes – Supplier Deliveries and New Orders – appear to have reached the bottom in the current cycle (see table 1). The tentative signals of a turning point will be validated tomorrow and in the months ahead. If readings of these indexes maintain an upward trend until the close of the second quarter, it will be a signal that the economy is turning around.
