Whilst this is only the second consecutive decline on the index, the dip below 50 has not come without warning as the individual components gave the heads up that the trend may chance.
- Prices have been below 50 for 14 months
- Backlog of orders contracting for 7 months
- Inventories contracting for 6 months
however what has been of interest to me these past few months are to see new orders, production and employment approach and break below 50. These are all leading indicators of a leading indicator so if these trends persist then it is hard to see how growth can meet the FED's expectations.
It can be argues that manufacturing is playing a lesser role in the US economy, which brings into questions it usefulness as a leading indicator. Services (which accounts for a significantly larger part of the us economy) is still expanding but at a slightly slower rate. So I will be keeping a close eye on the ISM non-manufacturing read throughout the year to see if services goes down with manufacturing or manufacturing catches up with services.
Just before the festive break it appeared that GDP was on track for a big revival but a quick glance at the chart below shows just how wrong that assumption was. FED Atlanta's GDPnow attempts to track the quarterly GDP in real-time and today it sits around at mere 0.3% for Q4. This will naturally become a concern for the FED as they continue their anticipated rate hike program and will continue to be a 'make or break' theme for USD and global markets throughout 2016.