"We do not read it for the headline. We read it for where demand is breaking and where it is starting."The composite headline (>50 / <50 threshold) is a lagging average of five equal-weighted sub-indexes. The alpha is in the sub-indexes and sector-level reads. Track momentum streaks, not snapshots — a regime change shows up as 8 months of expansion followed by a single inflection month.
| Sub-Index | Weight | Timing | Signal Logic |
|---|---|---|---|
New Orders |
20% |
Leading | Most forward-looking component. Falling orders precede production cuts by 1–3 months. Primary watch. |
Production |
20% |
Coincident | Current output. Confirms or denies what New Orders is signaling. |
Employment |
20% |
Lagging | Hiring/firing by purchasing managers. Lags New Orders. Cross-reference with BLS jobs data. |
Supplier Deliveries |
20% |
Inverted | Inverted: SLOWER deliveries = high demand = bullish. FASTER deliveries = demand slackening = bearish. This sub-index moves opposite to the others. |
Inventories |
20% |
Context | Context-dependent. Rising during pullback = demand destruction. Rising during expansion = restocking cycle. Read with New Orders. |
| Sub-Index | What It Signals |
|---|---|
| Prices Paid | Goods inflation signal. Leads CPI/PPI by 1–2 months. Divergence with New Orders = supply shock (not demand-driven). |
| Backlog of Orders | Demand backlog. Confirms New Orders momentum. Rising backlog + rising New Orders = strong expansion signal. |
| New Export Orders | International demand. Useful for isolating domestic vs. global cycle. |
| Imports | Domestic demand for foreign inputs. Rising = domestic demand is pulling in more goods. |
| Customer Inventories | If customers rate their stocks "too low" → restocking cycle imminent → bullish demand for 1–3 months ahead. |
Services often moves independently from manufacturing. Critical for "supercore" inflation tracking (services prices = stickiest component).
| Sub-Index | Note |
|---|---|
| Business Activity | Production equivalent for services sector. |
| New Orders | Forward-looking. Same logic as manufacturing. |
| Employment | Lagging. Cross-check vs. BLS JOLTS. |
| Supplier Deliveries | Same inversion logic as manufacturing. |
| Prices | Critical. Services inflation is stickier than goods. Leads core CPI services sub-component. |
| Category | PCE Weight | CPI Weight | Implication |
|---|---|---|---|
| Shelter | ~16% | ~34% | PCE shelter weight is half of CPI. PCE disinflates faster as rents fall. |
| Health care | ~17% | ~7% | PCE uses producer-side health prices (lower). CPI uses consumer-paid prices (higher). |
| Regime | Trade Implication | Avoid |
|---|---|---|
| Supply Shock Orders↓ / Prices↑ |
Don't short the constrained commodity. Long downstream (freight when inventories rebuild). | Capex plays with falling order books. |
| Sweet Spot Orders↑ / Prices↓ |
Broad equity rally. Cyclicals, industrials, small-cap. | Long duration (rates may rise with demand). |
| Demand-Pull Orders↑ / Prices↑ |
Hard assets, commodities, real assets, TIPS. Avoid long duration. | Rate-sensitive sectors. |
| Demand Destruction Orders↓ / Prices↓ |
Duration (Treasuries), cash, quality. Risk-off. | Cyclicals, credit, commodities. |
finance/macro/quad/gip_engine.py and plans/hedgeye-gip-estimate-provenance.md:
memory/reference_hedgeye_dual_speed_rate_of_change.md
| CPI Component | Leading Indicator | Lead Time | Source |
|---|---|---|---|
| Shelter / OER | Zillow ZORI, ApartmentList | 12–18 months | zillow.com/research |
| Used vehicles | Manheim Used Vehicle Index | 2–3 months | manheim.com |
| Airfares | Jet fuel prices (IATA) | 1–2 months | IATA fuel monitor |
| Goods inflation | ISM Manufacturing Prices Paid | 1–2 months | ismworld.org |
| Services inflation | ISM Services Prices | 1–2 months | ismworld.org |
| Medical care | CMS admin data | 6–12 months | cms.gov |
| Food at home | CRB Food Index, crop futures | 2–4 months | CRB, CBOT |
| Energy | WTI / Brent crude | ~1 month | CME, EIA |
| PMI Signal | Market Implication | Confirming Indicator |
|---|---|---|
| New Orders ↑ sustained | Capex cycle building; industrials/materials early beneficiary | Durable Goods Orders, Capital Goods ex-Defense |
| New Orders ↓ turn | Production cuts coming in 1–3 months; early exit capex plays | Factory Orders, Industrial Production |
| Prices Paid ↑ with Orders ↓ | Supply shock — constrained supply, not weak demand; don't short scarce commodity | PPI, Import Price Index |
| Customer Inventories "too low" | Restocking cycle imminent → freight/logistics demand surge | Census Wholesale Inventories, Trucking tonnage |
| Services Prices ↑ sustained | Supercore stickiness; Fed less likely to cut; rates higher for longer | PCE services ex-housing, ECI wage growth |
knowledge/finance/economic-indicators/pmi-cpi-framework.mdfinance/macro/quad/gip_engine.pyfinance/macro/nowcast/nowcast.db — CPI nowcast, GDPNow, NY Fed WEI, ensembleplans/hedgeye-gip-estimate-provenance.md — Decision #520memory/reference_hedgeye_dual_speed_rate_of_change.md