PMI explainer: A key indicator of the global economy

Dec 2, 2013

PMI explainer: A key indicator of the global economy

Dec 2, 2013

The Purchasing Managers Index is upon us!

A Purchasing Manager is someone who buys stuff for a company. And every month, they tell us something about the economy, by telling us about how all their purchasing is going.

Doug Fischer runs Marquette University’s Center for Supply Chain Management.

“We will ask them about their new orders  — better the same or worse, production levels, inventories, employment, supplier deliveries,” says Fischer.  

The idea is if you ask how these things are going at companies, you can figure out where the economy is headed over the next few months. 

“For people in financial markets it gives an early read on whether things are improving, and that gives an idea of whether interest rates might rise or stock market might do better,” says Kevin Logan, chief U.S. economist for HSBC.

The magic number is 50 — if the PMI is above 50, it means all of those things (production levels, inventories, etc) are improving. If the PMI is below 50, it means things are getting worse.  

The U.S. PMI this month, according to the Institute for Supply Management, is 57.3. 

Overall, “they’re pointing to a pretty broad improvement in the global economy,” says Michael Feroli, Chief U.S. Economist at JP Morgan.   “You’re seeing strength particularly in Asia and the U.S. and some pockets of Europe.”  Germany’s PMI hit a 2.5 year high, while France’s declined.

“In the U.S. the motor vehicle sector seems to be picking up,” says Feroli, “and in Europe what you’re seeing is a gradual easing up of some of the stress caused over there by tightening financial conditions.”

But the PMI just covers the short term – in a few months everything could change.  And for now, even though most countries are doing better, not many are doing great.   Logan says what’s been missing in the U.S. and global economy, particularly in Europe, has been a “vigorous expansion in business capital outlays, investment spending.”               

We’ve been living in a world of easy money and low interest rates, but Logan’s troubled by the fact that businesses haven’t taken much advantage of either.  

“Housing has yet to fully recover from the move up in mortgage rates this year,” points out JPMorgan’s Feroli.

And there are some “red letter dates” coming up on the calendar as well.  “The biggest risk to the global economy,” says Jeff Burchill, CFO of FMGlobal, “is the political uncertainty in Washington.”

Then again, that kind of uncertainty has been the norm for some time. 

“At the same time, the risks we see don’t seem to be in any greater than they normally would be,” says Feroli.

The current slew of PMI’s are good — but they don’t paint a picture of unbridled strength. 

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