Under the Microscope: Pneumatic Market Indicators from IEOC

Stats Deep Dive

NFPA’s Industry & Economic Outlook Conference (IEOC) has long delivered a variety of fluid power industry indicators identified by industry experts every year. Whether you are looking for a short-term leading indicator, long-term leading indicator, or coincident indicator, you walk away from this August event with quite a few options. But before attendees head back to the office to apply these new resources, I always recommend ensuring their validity with a tool such as the NFPA Stats Toolkit.

The Stats Toolkit’s Correlation Analysis Report uses lead/lag and correlation analysis to discover leading indicators and recognize relationships between two data series. This tool not only identifies the correlation percentage between two data series for a specific date range, but also applies a monthly lead/lag effect, shifting one data series forward in monthly increments, to the cross-correlated data series to uncover how strong or weak the relationship is between the two data series.

Let’s take a look at some of the pneumatic market indicators mentioned throughout the 2019 IEOC compared to NFPA’s Pneumatic Shipments Index. These indicators were displayed in a 12/12 ratio format at the event and will be analyzed in the same data format. Tip: Check out the analysis of hydraulic market indicators from the 2019 IEOC compared to NFPA’s Hydraulic Shipments Index here.

PMI vs NFPA Pneumatic Shipments

The table below first identifies the lag length between the two data series, then the correlation percentage while applying the lag length, and finally the number of observations (No. Obs.), or number of data points in each data series. The trend graph below simply gives you a visual representation of the two data series plotted together with the optimal lag to correlation.

We will start with “Purchasing Managers Index (PMI)” from the Institute for Supply Management, a measure of the prevailing direction of manufacturing economic trends that is based on a monthly survey of supply chain managers across 19 industries and one of our industry’s most popular indicators. After examining this relationship, the results are very impressive. A 94.0% at a 3-month lag length is a very strong relationship between these two data series, and it also offers users a valid short-term leading indicator with a 3-month lag. You would read this relationship as, when the PMI increases/decreases from one month to the next, there is a 94.0% chance that NFPA Pneumatic Shipments will experience the same trend three months later.  Validation: Pass

 

U.S. Non-Defense Capital Goods New Orders vs NFPA Pneumatic Shipments

Next, we look at U.S. Non-Defense Capital Goods New Orders, an orders data series that originates from the U.S. Census Bureau’s M3 report. While not quite as strong as PMI, a correlation of 83.7% at a 1-month lag length still demonstrates a strong relationship but lessens the lead of the indicator to only one month. You would read this relationship as, when U.S. Non-Defense Capital Goods New Orders increases/decreases from one month to the next, there is an 83.7% chance that NFPA Pneumatic Shipments will experience the same trend one month later.  Validation: Pass

 

U.S. Material Handling Equipment New Orders vs NFPA Pneumatic Shipments

Our next indicator is U.S. Material Handling Equipment New Orders, another orders data series that originates from the U.S. Census Bureau’s M3 report. After examining this relationship, the results are disappointing, displaying a much weaker correlation of 52.4% at a 2-month lag length. My general correlation percentage cut-off for a usable indicator is 70.0%, meaning that this is not a recommended indicator. You would read this relationship as, when U.S. Material Handling Equipment New Orders increases/decreases from one month to the next, there is an 52.4% chance that NFPA Pneumatic Shipments will experience the same trend two months later.  Validation: Fail

 

U.S. General Purpose Machinery Production Index vs NFPA Pneumatic Shipments

Our next indicator is U.S. General Purpose Machinery Production Index, a data series that originates from the Federal Reserve Board’s G.17 report. We return to another strong correlation of 81.9% but with no lag. The lack of a lag length lessens the usefulness of this indicator, but the strong relationship does allow you to validate and examine trends. You would read this relationship as, when the U.S. General Purpose Machinery Production Index increases/decreases from one month to the next, there is an 81.9% chance that NFPA Pneumatic Shipments will experience the same trend at the same time.  Validation: Pass

 

U.S. Heavy Truck Production Index vs NFPA Pneumatic Shipments

Our next indicator is U.S. Heavy Truck Production Index, another data series that originates from the Federal Reserve Board’s G.17 report. After examining this combination of data series, we find our worst results yet. Not only does the correlation analysis reveal a weak relationship of 41.0%, but it also has no applicable lag length. You would read this relationship as, when U.S. Heavy Truck Production Index increases/decreases from one month to the next, there is a 41.0% chance that NFPA Pneumatic Shipments will experience the same trend at the same time.  Validation: Fail

 

U.S. Medical Equipment and Supplies Production Index vs NFPA Pneumatic Shipments

And we’ll conclude our indicator validation testing with one last indicator data series that originates from the Federal Reserve Board’s G.17 report, the U.S. Medical Equipment and Supplies Production Index. The results from this correlation assessment was certainly unique compared to the other data relationships we analyzed. In the other cases, the most positive results of the data series relationships started very early, between a 0 to 3-month lag. This is the first case that shows the most positive results occur very late in the assessment, at 18 months with the possibility of a greater positive result if we could extend the analysis even further. With a result of 70.9% correlation at 18 months lag, this indicator passes the test, but requires additional testing beyond the 18-month lag to identify its true potential. You would read this relationship as, when U.S. Medical Equipment and Supplies Production Index increases/decreases from one month to the next, there is a 70.9% chance that NFPA Pneumatic Shipments will experience the same trend 18 months later.  Validation: Pass, but additional analysis recommended.

 

In conclusion, the importance of ensuring the validation of suggested indicators should be held in high regard. Many economic events and resources may propose the use of certain indicators, but until you run them through the proper validation testing, proceed with caution when using them to make any major business decision.

Important Reminder – Please note that this analysis has been conducted using total pneumatic shipments data and does not mean that the same relationship will be maintained by your company. Further analysis using your company data will be required to verify the relationships of these and other economic indicators.

While the analysis above was performed using NFPA’s Stats Toolkit, the industry data can be accessed through participation in NFPA’s Confidential Shipment Statistics (CSS) and a variety of economic indicator data can be accessed in NFPA’s Customer Market File (CMF).  A full list of NFPA market information resources can be viewed when you CLICK HERE.

Questions? Contact Eric Armstrong at earmstrong@nfpa.com or (414) 778-3372. Eric Armstrong also offers a free Stats Toolkit Walk-Through Webinar for those individuals who would like a detailed walk-through of this valuable tool.