So much of economic analysis depends on correlations.
Lately, I've heard lots of talk about thinks like ratios of new orders to inventories in the ISM manfacturing index and overlaying that with recessions.
There are dozens of other examples of cherry-picked correlations overlayed with the long history of economic data.
It's garbage.
It's not that the correlations aren't valuable in a normal time, it's that we're not in a normal time.
It's like saying that since initial jobless claims rose by 6 million in March 2020, we were headed for the worst depression in global history. What had really happened is that the economy had shut down due to a pandemic. It wasn't a normal cyclical downturn and need not be compared to any. If your model was built around using that claims data -- or any March 2020 data -- as a predictor of what was to come, you got the wrong signal.
The reverberations continue to underpin many economic indicators.
Manufacturing is particularly notable. Factories were shut down, then during the stay-at-home period, consumers were buying goods like crazy and the factories couldn't catch up. So manufacturing has been running red hot in an effort to fill the orders. Eventually, they will fill them and production will slow down.
Now if you compare that slow down to a regular economic cycle, it looks like something has gone wrong on the demand side. But this isn't a normal economic cycle. Any economist with half-a-brain should have figured out by now that manufacturing will slow. And any one with a fully fuctioning brain should realize that the slowing in manufacturing isn't a sign of a stumbling economy, but rather of a normalization.
Of course, that's all going to be a sloppy process. People are uncertain and we don't know which level inventories will get back to. I would have expected companies to run larger inventories a year ago and especially with China's open-and-closed economy but all the recession talk might put inventoy managers right back into the just-in-time mindset.
In any case, many of the signals in the eocnomy are similarly skewed.
The answers aren't going to come in chart overlays because this isn't a normal business cycle. It's an economy that's been externally bounced around by a pandemic, a reopening, government largess and broken supply chains.
Figuring out where it's headed will take some creativity, not references to old playbooks.
