This Gauge Is The Best Predictor Of The Economy, And It’s Looking Up

This Gauge Is The Best Predictor Of The Economy, And It’s Looking Up
Paul Allison, CFA

5 months ago2 mins

You could spend a lot of time fretting about the current state of play. And, sure, with stubborn inflation, higher-for-longer interest rates, and an increasingly unstable geopolitical landscape, there’s a lot to fret about. But, despite all this (gestures wildly), stock markets are holding in there, just about. If you ask me, there’s one big reason why and it’s neatly illustrated in the chart. The ISM (Institute of Supply Management) new orders index is a sub-component of its big monthly survey of firms across the US. It asks business owners what their customers are doing and whether they’re seeing new orders. This gauge is widely considered to be one the best predictors of future economic activity, and take a look: after a long downward slope, it looks to have turned a corner.

Now, it’s not entirely out of the woods: the reading for September came in at just 49.2, and anything below 50 indicates a contraction, while anything above 50 indicates expansion. So, yes, new orders are still falling. But that September figure was the highest in almost a year, and you don’t need to be an economist to see from the chart that once a positive trend sets in, it tends to continue.

So let’s take a well-earned sip from our half-full glass for a moment. There’s a decent chance that a brand new cycle of improving economic activity has already begun. That would contradict everyone calling for an imminent recession – a recession which, incidentally, was “supposed” to be on top of us by now.

Look, I don’t have a functioning magic eight ball here, but I do know it’s important to consider the other side of an argument. I also know that current market sentiment is pretty lousy, and yet markets aren’t imploding. So maybe a new economic cycle has begun, and if inflation can be kept on a tight leash, then things might turn out better than people think. In markets, that’s what tends to happen.



All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG