A much-watched economic indicator is the PMI, or the Purchasing Managers Index, which tracks the intentions of executives across various countries, industries, and sectors, and is a useful tool to gauge the level of business confidence and activity.
The sort of questions survey respondents answer are typically as follows:
- New orders – from customers.
- Production – rate, and direction of change in the level of production.
- Employment – whether increased or decreased.
- Supplier deliveries – are they slower or faster?
- Inventories – increases or decreases in stockpiles.
- Customer inventories – rates the level of inventories held by the organisation’s customers.
- Prices – reports whether organisations are paying more or less for products and services.
- Backlog of orders – measures whether the order backlog is growing or declining.
- New export orders – measures the level of export orders.
- Imports – measures the rate of change in imported materials.
The index is a diffusion index, which means that a reading of 50% indicates no change from the preceding month, while the further away the index reading is from 50%, the greater the rate of change. Thus a reading of 100% indicates that all survey respondents are reporting increased activity – as may be the case in an exceptionally strong economy. While a reading of 0 indicates that all respondents are reporting decreased activity.
In the chart below, we can observe that the global composite PMI rose in February to 52.1; both the manufacturing component (+0.9pt to 50.0) and the services component (+2.6pt to 52.6) increased. Global new orders rebounded to expansionary territory (+1.4pt to 51.3) for the first time in 7 months, led by strong Emerging Market growth. While the PMI measure for Developed Markets is at 50, the chart shows a rapid rise from 47 in recent months.
Global New Orders Rebounded to Expansionary Territory for the First Time in 7 Months, Led by Strong EM Growth
Source: Goldman Sachs
The PMI is an important leading indicator that can move financial markets. However, it may be best to wait until other indicators also confirm the economy’s turnaround, rather than making wholesale portfolio changes based on a single reading. Delving into the detail of the numbers is often essential to enable a better read rather than going by the headline PMI figure alone. Nevertheless, it is a useful identifier of trends in the global economy.
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