We discuss how this data offers an extremely useful insight into the economy
Thursday 21 Feb 2019 Author: Ian Conway

Every so often a piece of economic data comes along which causes stock markets to have a major wobble.

Among economic releases, by far the most widely anticipated are the US non-farm payrolls and the US manufacturing purchasing managers’ index or PMI.

Non-farm payrolls are simply the number of people joining the workforce each month in every sector except agriculture.

Although employment is a lagging indicator for the economy there is still a buzz each month ahead of the figures as they are the earliest release based on hard data to provide an insight into the health of the world’s largest economy.

PMIS ARE A LEADING INDICATOR

Manufacturing PMI data offers a better insight into the economic trajectory.

Even though many developed economies are no longer driven by manufacturing, the UK being a good example, when manufacturers are confident they invest in their businesses.

This in turn leads to increased employment which leads to higher levels of consumer confidence and ultimately consumer spending.

The fact that it is a forward-looking index makes the PMI a much better lead indicator of a country’s economic prospects than the latest employment or consumer spending figures.

WHAT’S IT ALL ABOUT?

Every month, purchasing managers, that is the people who buy in the raw materials, goods and services required by a company, are asked a series of questions about their business to gauge how positive or negative they’re feeling about the immediate future and about the longer-term outlook.

The questions include levels of manufacturing (how busy they are), levels of new orders (how busy their customers are), levels
of inventory (how much stock they have) and levels of employment (whether they are hiring or firing people).

The questions are quite general and the replies are sorted into more positive than last month, less positive than last month, or no change on last month.

WHAT DOES IT MEAN?

The index itself is what’s called a ‘diffusion index’ which means it measures the percentage of positive responses minus the number
of negative responses.

Each month the change in sentiment – whether it’s positive because more managers gave positive responses or negative because there were more negative responses – is added to the previous month’s index number to create a new number.

If every purchasing manager is positive month after month the index will only go up and if they are gloomy month after month it will keep going down.

The crucial level for the PMI is 50: a reading above 50 is taken to mean that manufacturing is expanding, a reading below 50 means it is contracting.

WHAT IS IT TELLING US RIGHT NOW?

Looking around the world, some countries are further along in
their economic expansion than others so there’s a wide range
of readings.

The highest reading is in the US where the manufacturing PMI was 56.6 in January supported by positive responses on the outlook for production, new orders and employment.

The lowest reading is in China where the PMI hit 48.3 in January, well into economic slowdown territory.

This negative sentiment among manufacturers is one of the reasons why the Chinese government has launched its latest stimulus plan.

Germany’s PMI is just below 50 but it has been falling steadily and it looks as though it will continue falling this year.

The German government recently cut its GDP growth forecast for 2019 from 1.8% to 1.0% and is hoping for a rebound in 2020 although that seems like wishful thinking.

France’s PMI fell below 50 in December due to the ‘yellow
vest’ protests but recovered to 51.2 in January as employment prospects improved.

The protests have had a bigger impact on France’s service sector, which includes travel and tourism, with the January services PMI survey coming in below 48 for the first time since 2014.

WHAT DOES THE UK LOOK LIKE?

The UK manufacturing PMI is still above 50 and has been surprisingly steady around the 53-54 level for most of 2018.

Admittedly it dropped to 51 in October but by December it had moved back over 54 and last month it was 52.8.

One reason that more companies in the UK are positive than negative is that their customers are stockpiling products ahead of a potential no-deal Brexit.

It was widely reported toward the end of last year that major drug companies like AstraZeneca (AZN) and Sanofi were building up their supplies of drugs and medicines.

According to newspaper reports care homes are also starting to stockpile food supplies for their residents.

Consumer-goods firms are the most positive in the survey and companies like Unilever (ULVR) have stepped up production of Magnum ice creams to stockpile for UK consumers and Dove and Lynx personal care products for the European market.

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