Reading PMIs: A Cautionary Note

The flash Purchasing Manager Indices (PMI) have just been released by Markit, which shows the manufacturing sectors in the U.S. and Europe continue a strong rebound.

IHS Markit Flash U.S. Manufacturing PMI™

Manufacturers indicated the fastest improvement in operating conditions since January 2019 in September, as highlighted by the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posting 53.5, up from 53.1 in August. The expansion was solid overall, signaling a further recovery from April’s nadir. – Markit

 

Custer Consulting tracks two measures of PMIs for the U.S., the Institute of Supply Management (ISM), and Markit’s (PMI).

Monthly Change

When comparing the PMIs to prior reads,  it is important to keep the following in context, as we hear a lot of chatter these days that many countries manufacturing Purchasing Manner Indices (PMI) are back to levels where they were before the Great Lockdown. For example, the U.S. PMI, as measured by the Institute of Supply Management (ISM), came in at 56.0 in August, which was the highest level since the 56.6 ISM in January 2019.

Are the two data points comparable?

We think not as PMIs are an index, which comprises thousands of purchasing managers’ answers to whether they see economic activity over the current month as declining, improving, or remaining about the same compared with the previous month. The firm collecting the surveys – Markit or ISM – then summarizes these responses to produce a diffusion index where 50 signals no change in activity from month to month. Anything below 50 is a contraction and anything above 50 an expansion compared to the prior month.

The PMI is, therefore, a measure of the change in economic and business activity only over the preceding month and cannot be compared to the same month in the prior year, for example.

We illustrate this in the following chart where the August PMI (ISM) of 56.0 corresponds to a Manufacturing Capacity Utilization rate of 70.2, which is almost 10 percent lower than the December 2018 recent high of 77.3 percent and a PMI (ISM) of 54.3,   Thus even as the recent monthly PMI exceeded the December 2018 level, manufacturing capacity, as measured by Industrial Production data from the Federal Reserve, was 10 percent lower.

Upshot

The upshot? PMIs are a diffusion index, where > 50 is expansion, < 50 is contraction. When viewing PMIs, think in terms of one-month changes in economic and business activity over the prior month, the first derivative if you will, and not levels.

The above is especially true in the current environment, and these indicators should not be read as an accurate reflection of changes in output from month to month when conditions are as volatile as they are right now. As we stated in last week’s comments, there is still a lot of noise in the data