An often overlooked forward-looking economic indicator in production figures suggests a rebound in U.S. manufacturing is coming, and with it, “a broader economic pickup,” according to a top macro strategist.
Michael Kantrowitz, chief investment strategist at Cornerstone Macro, told Real Vision in an interview published on Jan. 25 that when the prices of inputs businesses use to make their final products hit bottom and start to rise again, this can be a guide to forecast an upturn.
“Very rarely do people focus on this input price component but its actually the only forward-looking data point in all the ISM data. It has an ability to forecast the business cycle with about a 15-month lead,” Kantrowitz explained.
The measure Kantrowitz is referring to is the ISM Purchasing Managers Index (PMI), which shows the prices of inputs jumped from a reading of 46.7 in November to 51.7 in December of last year, representing a growth of 5 percent. An earlier PMI also showed an input cost rise from 45.5 in October to 46.7 in November. But the previous months print for input prices shows a decline from 49.7 in September to 45.5 in October, a drop of 4.2 percent—the bottom from which Kantrowitz argues manufacturing will rebound.
Kantrowitz explained that the indicator, which tracks the costs of doing business, drops when input costs in general or interest rates (or both) fall.
“We found, in general, that the business cycle re-accelerates after youve had a drop in business costs,” he said. “Interest rates have come down and now, thats going to reinvigorate manufacturing activity, which will ultimately lead to better earnings and a broader economic pickup,” Kantrowitz argued.
He said in a tweet that another possible positive knock-on effect of lower input costs is that corporate earnings could end up revised upwards, supporting near-record high stock valuations.
“Starting in Q1, we expect positive #earnings revisions as lower input costs work their way through the global economy,” he said. “This should keep credit spreads tight and P/Es expensive,” he added, referring to the Price-to-Earnings Ratio, a gauge investors use to assess the value of stocks.
Starting in Q1, we expect positive #earnings revisions as lower input costs work their way through the global economy. This should keep credit spreads tight and P/Es expensive. Gains likely to be limited by a mild earnings recovery and already-easy financial conditions. pic.twitter.com/2SDeOAofBJ
— Michael Kantrowitz, CFA (@MichaelKantro) January 21, 2020
“I think the outlook is that were going to see a cyclical upturn in leading economic indicators,” Kantrowitz told Real Vision. “Were already beginning to see some of that, some of the housing data has been strong now for a couple quarters. We expect now the manufacturing data to take over, to tick up.”