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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

Leading indicators are essential in any fast-paced environment. It’s quite possible that the economy’s forward-looking signals are now more important than ever. Our bizarre on-again, off-again economic environment has brought confusion, and in spite of an ever-growing data deluge, an ongoing search for reliable guides. The search doesn’t seem to be working; opinions on the outlook cover the gamut: some see imminent recession, others, renewed growth, while many foresee a slow-growth ‘new normal’. Who, and what indicators, can be believed?

‘Recession bugs’ have their favourite leading indicators. Tumbling stock markets are among them. Since early-to-mid 2015, this bellwether has fallen in developed and emerging markets alike. They also point to Dr. Copper, the prescient red metal, down by over 35 per cent since mid-2014. Surely this reliable barometer is saying something. Then there’s housing. It has been pointing up in the US, but hardly anywhere else. Spending – particularly on durable goods has been non-committal – years of flat performance have created a persistent hesitation that has been hard to break away from. Are these signals heralding decline, doldrums, or are they deceived?

There’s a strong case for distortion. It’s quite possible that financial market indicators, however accurate in the past, have been muddied by huge liquidity injections. If those injections indeed inflated trustworthy indicators – like stock markets and copper prices – then their removal is now doing the opposite, causing them to give another round of false signals. If these, and possibly others are broken, are there others we can turn to?

One highly-anticipated monthly gauge is the PMI - the view of the purchasing managers. Collected through surveys in at least 41 countries, data on both the activities and perceptions of purchasing managers gives a sense of what businesses are anticipating in the coming six months. Pity this clan: in a turbulent world, they have to put money down on the inputs they need in order to keep their equally turbulent production lines going. They are paid to get it right; what are they saying?

During 2015, their message was mixed: from multi-year highs, buyers in US manufacturing firms steadily backed away, and for five of the past six months foresaw declining activity. The non-manufacturing sector was more sanguine, although their growth projections were revised downward late last year. European buyers held firm through 2015, but lowered their expectations through the turbulent patch early this year. Japan’s latest results are not good. China’s manufacturers worried everyone last year, with buyers repeatedly signaling a decline in activity. India wasn’t as bad, although its buyers hovered close to the growth-decline marker. Put it all together, and those who have to put their money where their mouths are don’t seem too happy.

No doubt, they, too are affected by the distorted signals. If so, they can make a wrong guess, and if it’s on the down-side, then what must follow is a flurry of activity to make up for insufficient recent purchases. Look at some of the most recent data, and this may indeed be happening. One month isn’t much to go by, but March numbers are at least mildly exciting. In the US, buyers in the manufacturing sector lurched back into the black. New orders surged, and order backlogs began to swell. The service sector slide was also interrupted. The increase in the Euro Area was more muted, but their buyers’ index erased most of the early-year losses. China’s index also vaulted into positive territory, thanks to a big bump in export orders. India did the same, with its composite index showing a smart up-trend.

Is this a blip, or the beginning of something big? Time alone will tell. But at a moment when there seems to be a whole lot more reason to hold on and wait, this group of front-liners with a lot at stake in the game are placing their bets on growth. If the movement was isolated, it would be one thing; but the multi-country, multi-industry lurch into growth could end up being quite a significant development.The bottom line? Amid the mixed barometers out there, the PMI is suddenly pointing upward. It’s one that matters more, as those making the call are putting their jobs and reputations on the line. It’s too early to get too excited, but this one is one to watch.

[Source: EDC]

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