The US ISM index crept higher in April, although the closely-watched differential between new orders and inventories suggests this strength may not last. It is worth taking a closer look at this relationship, as the dynamics appear to have changed since 2009 from the prevailing 20 years.
In the last 4 or so years, we have seen a more frequent narrowing in the gap between the new order and inventory components, which historically lead to a fall in the headline index, usually to below 50 levels.
But weakness in this differential doesn't appear to be as useful a leading indicator of the headline index.
This seems to be mostly due to the inventory index, which is now more volatile at a high level than in the past an dis much more frequently above 50.
Part of this maybe structural, with the gains of globalising supply chains approaching is maximum, with the downturn exposing problems with such a disaggregated approach to manufacturing.
It also maybe a function of patchy demand. This current period of inventory and new order changes is not only different to 1990's onwards, but also from the 1970s and 1980s. Back then, we saw wilder swings in inventories, but also bigger movements in new orders.
So it does appear that old relationships aren't as meaningful as they once were, or at least require an additional look at the data.
Elsewhere, some of the PMI data won't be released until Monday thanks to a public holiday, but the flash estimates released a week ago should be around right. In China the official index lifted a little to 50.4 and is still above the HSBC measure.
This is not unusual and is probably tracking the 2012 experience at present. While this wasn't a disaster for the Chinese economy, it was a period commodity prices were weak.
Also of note is the big fall in the Japan PMI on the introduction of the consumption tax rise in April. As a preliminary sign of what it means for growth this year, its clearly not a good one.
