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Liberum industrial indicator sees sharp slide

06 February 2015 | Mentions of Liberum

(LONDON) There is potential for a significant decline in orders from the world’s metal bashers after Liberum’s proprietary Early Cycle Indicator fell markedly this week, raising a concern that the strength of many US industrial companies can no longer offset a weakening outlook elsewhere. See chart below taken from research note.

Early Cycle Indicator Chart

The monthly Indicator, created by Liberum’s European Capital Goods Analyst Daniel Cunliffe (picture below), weights new orders from the Purchasing Managers Indices versus inventories in Europe (50% of the Index), the US (30%) and China (20%).


“Whilst Europe moved out of negative territory for the first time in five months, rising to 1.04 from 0.99, this was more than offset by a large fall in the US from 1.27 to 1.04”, Daniel said. 

“This was the biggest drop in the US series since October 2009 and while it is just one data point, it does raise doubts over whether US strength can offset a weak outlook in Europe and Asia,” he added. 

The ECI is 80% correlated with volume growth at giant global industrial firms and offers a six-to-nine month lead on trends. The early cycle refers to the critical period after a slowdown when companies buy smaller items such as ball bearings or drill bits for products sold, or projects delivered, in the near term. Late cycle refers to major capital expenditure such as factories and power plants that meet rising demand from the early circle. 

The 16-year-old index has seen such falls exceeded in just six periods, with most of those occurring as a result of extreme events such as the collapse of Lehman Brothers, 9/11 and the Iraq War. 

The index has now fallen below 1.05 for the first time since June 2011, which preceded a material fall in volume growth. There was a similar trend when the index fell below 1.05 in April 2008.

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