CEIC News@lert: ISM Purchasing Managers’ Index (PMI)

CEIC Global database: ISM Purchasing Managers’ Index (PMI) - April 17, 2015 The Purchasing Managers’ Index (PMI), published by the Institute for Supply Management (ISM), is a diffusion index, providing users with an overview of economic activity in the US manufacturing sector. HIGHLIGHTS The survey is conducted by polling representatives from approximately 400 key players involved in manufacturing activities. Survey respondents – who are generally purchasing managers – are polled on issues ranging from production, inventories (stocks), prices and employment, among others. The survey comprises questions that ask about different facets of business management and records a standard response on whether it is “Better”, the “Same” or “Worse”. The responses of each component survey are subsequently compiled into a diffusion index as follows: The Sub-Indicator Diffusion Indexes then form the basis of the PMI, which is a composite index with equal weights of the five indexes as below: A value below 50 points implies contraction of manufacturing activity, while a value above 50 points reflects expansion. HIGHLY PREDICTIVE INDICATOR OF ECONOMIC MOVEMENT The PMI that is typically released on the first day of the month is one of the most reliable leading indicators in predicting the mood of the US economy. The GDP growth trend typically follows closely behind the movement in the PMI, where a decline in the PMI or a fall below 50 points frequently coincides with a weaker economic performance. The PMI’s relevance as a predictive leading indicator was most evident during the 2007-2008 Global Financial Crisis where the directional change in the PMI gave a hint to the possibility of an economic expansion or contraction in one to three months’ time. The PMI for the US fell below 50 points for five consecutive months since February 2008 before declining to its trough of 33.1 points in December 2008. Shortly after the consecutive months of falling sentiment depicted by the PMI, the US economy fell into recession from the third quarter of 2008, which saw real GDP contracting year-on-year (YoY) for six successive quarters. The unemployment rate also rose to its peak of 10.6% in January 2010 from 6% at the start of the economic downturn in September 2008. When the PMI rose above 50 points for the first time since January 2008 during August 2009, the economy started to improve, turning a GDP contraction of 0.24% YoY during the last quarter of 2009 into a 1.6% YoY expansion during the first quarter of 2010. Since the composite index contains vital information on various aspects of the economy, such as production, employment, foreign trade and sales, it gives a general insight into the manufacturing industry and economy as well as a perception of the short-term outlook. As such, the index and its components are tracked by market traders, analysts and even some of the federal agencies such as the Federal Reserve Bank. Its timeliness also gives it a “first-mover” advantage in appealing to users who wish to conduct a quick analysis on the country’s economic performance. PMI SHOWS DAMPENING OUTLOOK FOR US ECONOMY The US PMI fell for five consecutive months to 51.5 points in March 2015 from 57.9 points in October 2014. Despite still showing an index value above 50 points, depicting expansion, the decline shows a weaker sentiment among the professionals surveyed. Much of the decline in the PMI was driven by falls in its sub-indexes with previously large index values, namely the Production Index and New Orders Index. The PMI’s Production Index declined for four consecutive months since November 2014, to 53.7 points, before marginally increasing by 0.1 points in March 2015, although it is still below the mid-to-late 2014 levels where the index stood in excess of 60 points. This view of dampened production is shared by the Industrial Production Index which only grew by 3.47% YoY in February 2015, its weakest growth for the past 12 months. The PMI’s New Orders Index, too, declined sharply by 11.2 points to 51.8 points in March 2015 compared to October 2014, the largest decline among the five constituents of the PMI during the same period. The US economy already slowed moderately during the last quarter of 2014 when real GDP grew by 2.37% YoY compared to 2.70% in the previous quarter. In view of the falling PMI, the prospect of a higher GDP growth is reduced. This is further highlighted by the fact the PMI’s Production Index and New Orders Index, which are guides to market sentiment for supply and demand in the economy, are the two that experienced the largest decreases. This does not bode well for the labour market and consumer spending in general and will mean lower contributions from personal consumption and export volume to economic growth, two important pillars of GDP, dampening prospects. CONCLUSION The manufacturing sector is highly significant to the economy of the US as it is the leading source of innovation and global competitiveness for the country. The US manufacturing sector is among its most dynamic sectors with one of the highest productivity growth among other sectors. This is crucial as, in the words of the former Federal Reserve Bank Chairman, Ben Bernanke, "productivity is perhaps the single most important determinant of average living standards". Despite the correlation in movement between the PMI and some of the main economic indicators, it should not be viewed as the sole indicator in providing an outlook of the economy and industrial sector. Instead, the PMI should be used together with other economic indicators like foreign trade, fiscal balance, jobs opening and such like, which help to give a more rounded perspective of the economy. By Adrian Dela Cruz - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
17th April 2015 CEIC News@lert: ISM Purchasing Managers’ Index (PMI)

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