The PMI indexes are one of the most used fundamental analyses to give a leading indicator of where economies are heading. They tend to lead GDP results (a lagging indicator) by 3 to 6 months. Let’s take a tour of the following charts of global PMIs – see here where one can get these reports monthly and see other countries’ PMI indicators.
What is the Purchasing Managers’ Index? The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. The purpose of the PMI is to provide information about current and future business conditions to company decision-makers, analysts, and investors.
The PMI is compiled and released monthly by the Institute for Supply Management (ISM). The PMI is based on a monthly survey sent to senior executives at more than 400 companies in 19 primary industries, which are weighted by their contribution to US GDP. The PMI is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment. The ISM weighs each of these survey areas equally. The surveys include questions about business conditions and any changes, whether it be improving, no changes, or deteriorating.
The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change. The further away from 50 the greater the level of change. Do note that these PMI results come in the form of both manufacturing and service sectors.
The global PMI tour.
December PMI data from the US indicated a further subdued upturn in production across the US manufacturing sector. With the exception of October and November, the pace of output growth was the slowest since October 2020.
Despite alleviating pressures on supply chains in the EU, manufacturing sector conditions continued to disappoint, with output growth remaining unchanged from that seen during November (which was the second-weakest seen since production growth resumed in July 2020).
Operating conditions across China’s manufacturing sector improved slightly at the end of the year, according to the latest PMI data. Firms signaled the strongest increase in output for a year amid a renewed uptick in total sales. However, foreign demand remained lackluster, with export orders broadly stagnant.
The global composite manufacturing sector ended 2021 still positive. Rates of increase in output, new orders, and employment all accelerated, while business optimism data indicated companies expect output to rise further over the coming year. But more recently it has been flat.
As one can see in most of these countries’ PMIs, the indexes dipped hard on the initial Covid “pandemic” and then made a massive recovery when many of the restrictions were lifted and governments and central bankers responded. Since the PMI indexes are coming off again, though not yet going negative – remember this is an oscillating indicator. The takeaway is that economies are beginning to weaken – remembering that this is a 3 to 6 month leading indicator.
Many of the economies of the world have had massive stimulus from governments and central bankers over the past two years. Considering all this stimulus, the growth has been rather anemic. To maintain the current level of growth, governments and central bankers will need to maintain the current level of stimulus to maintain this level of business activity. If not, the economies will slump.
On the other hand, if stimulus levels continue “as-is,” more of the inflation fears we have recently seen will exacerbate. The argument can be said that – though the stimulus of governments and central bankers have helped in the short term, they largely have not jump-started global economies for solid new growth since the start of Covid.
So do governments, and central bankers have a Plan B?
Continue to watch this thread of #chartoftheday, and the Right Wire Report will report on major changes in the future on these indicators that can affect the economic world we live in.
See more #chartoftheday posts.
