12 SEPTEMBER 2024
The old saying that “when America sneezes, the world catches a cold” still holds true, even though Chinese growth and inflation trends now also play a dominant role in setting global economic conditions.
US services activity is by far the largest component of annual GDP, accounting for more than 75% of total output. But it tends to be relatively stable, meaning the state of the manufacturing sector typically determines whether the overall economy is expanding or contracting.
The chart below helps to gauge the risk of a US recession and is currently suggesting the probability of a contraction is relatively low.
The “ISM Recession Indicator” amalgamates three of the sub-components of the monthly ISM manufacturing index; a supply chain survey that dates back to the late 1940s.
Specifically, it adds together the new orders and backlogs sub-indices then deducts the level of inventories.
When the metric is trending higher (as it has been since May 2023) it indicates economic expansion as new orders and backlogs are outpacing inventory stockpiling. This infers end demand is rising, fuelling production growth. The converse is true when the indicator is declining, as we saw during the 2008 and 2020 recessions.
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