Wednesday, July 08, 2009

A Green Shoot That Is Not Less Bad But Actually Good

Many data points have been cited as green shoots since they are simply "less bad". For example, if earnings continue to decline, but at a lower rate, this has been cited as a positive or green shoot. Well, one data point that is actually positive is the New Orders minus Inventories (NO-I) data point. Argus Research notes:
  • During June, the NO-I jumped to a reading of 18.4, bringing the second-quarter average sharply into positive territory (at 16.7).

  • The New Orders minus Inventory Index...has offered the most-promising indication of an economic trough.
  • This barometer accurately identified the troughs in 1990-91 and 2001 recessions.


3 comments :

Jake said...

Interesting.

So... if new orders increase and inventories decrease, then that means old orders are finally being filled. If that is the case, then any new order is filled not from inventory, but from production. If new orders are filled from production, then something is actually being produced and the economy is actually moving again.

Thoughts?

David Templeton, CFA said...

Ten industries saw new orders increase with five showing declines. The issue, and you highlighted this in one of your recent posts,

"Mother of All Inventory Corrections"

is the five declining issues are contracting at a larger rate than the 10 growing industries.

Generally, a new orders index number above 48.8 is consistent with an increase in manufacturing orders. The new orders index for June equaled 49.2 although down from 51.1 in May.

In short, I do think it is a pretty positive print. I would like to see the new orders index find some stability though. Lastly, we need to see jobs created and simply not come in at a "less bad" number.

Matthew said...

Yes, interesting indeed. I'm having a hard time believing that things are going to be gangbusters again.

Could this be pipeline filling and inventory build? Is this the bounceback we've been waiting for after the giant inventory drawdowns?

I guess something (orders) minus nothing (inventory) is positive, regardless how small the orders number is.