The Empire State Manufacturing Survey, the Federal Reserve Bank of Philadelphia Business Outlook Survey, the Fifth District Survey of Manufacturing Activity and the Chicago Business Barometer each indicated that manufacturing activity in their respective regions expanded during January. Further, three of the four measures expanded on a month-over-month basis.

Given the strong linear relationship between this provincial data and national manufacturing activity (as reflected by the ISM PMI Index), the stage is set for a higher reading at the national level versus December when the report is released on February 1.

However, to keep one’s enthusiasm in check, consider that the Chicago Business Barometer and the Philly Business Outlook series are showing small chinks in their armor. Specifically, the gauge of Chicago-area activity dipped (surprisingly) from a revised 62.2 in December to 60.2 for January. Moreover, the uptick in the Philly survey data this month was so modest that the three-month average for the series still declined (I like to look at the three-month average to smooth out some volatility and to make the trend more clear; three month averages of the regional data have historically demonstrated stronger correlations with the ISM PMI than the raw regional data).

Consistent with the early caution signs being flashed by a couple of regional indicators, the view of the Morgan Stanley Cross-Asset Strategy Team is that the improvement in macro-level growth is a “head fake”. Though data points of late regarding manufacturing activity and the labor market have been encouraging, this group points to recent disappointments in retail sales, durable goods orders and trade to suggest that the forward path for growth is less clear. Additionally, the Cross-Asset Strategy Team points out that a failure to extend the payroll-tax cuts and unemployment insurance benefits beyond the slated February expiry would shave about 1% from 2012 GDP.

Also, per Exhibit 1, the Citigroup Economic Surprise Index, which measures the extent to which reported data bests consensus expectations, is near peak levels. This indicator oscillates around zero. As such, a period of less than impressive data at the macro level appears inevitable.

Exhibit 1: Citi U.S. Economic Surprise Index

The outlook for growth over the near-term is relevant to equity investors in spite of the weak to non-existent long-term relationship between these variables. Growth matters today because, as Gerard Minack, Global Equity Strategist at Morgan Stanley, has pointed out on several occasions, in post-bubble environments macroeconomic growth is key to risk asset performance. Exhibit 2 shows the S&P 500 and the ISM Manufacturing PMI for, essentially, the whole of the secular bear run. Notice how inflections are more-or-less consistent across the two series.

Exhibit 2: Equities & The Growth Cycle

Thus, is seems as though growth at the macro level is likely to holdup over the near-term, however, the strength could be fleeting. My current view that is that intermediate-term rally will peter out somewhere around the end of March. Another growth scare could certainly serve as a catalyst for the next bout of risk-off.

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