Purchasing Managers Index is a Good Economic Indicator
The Purchasing Managers’ Index is a good indicator how the economy is going and the long-term trend, month by month on a regular and timely basis. Here is a quote from an old article (Why Greenspan Focuses on Business Buyers) from BusinessWeek that emphasizes the importance of following this indicator:
“The report that Greenspan loves to watch is called the Purchasing Managers’ Index (PMI). Based on data from 350 to 400 NAPM members working in manufacturing, it ”has a fairly robust track record of accurately predicting trends in the economy,” says economist Joseph Liro of consultants Stone & McCarthy Research Associates in Princeton, N.J. For instance, the PMI turned downward a year before the 1990-91 recession. It also signaled the factory slowdown in 1997 and 1998, when the Asian financial crisis cut into demand for U.S. exports.” (BusinessWeek, 06/05/00.)
If you learn how to analyze the figures you could be better prepared when the industry starts contracting. When buyers purchase less due to high inventory stock levels, it could be a signal of forthcoming problems with paying invoices by the supplier due to decreased sales. The manufacturing sector is struggling with higher raw materials prices and a volatile commodity market. Please take note and read carefully the excerpt from ThomasNet Industrial Newsroom:
“While down, manufacturing has so far performed better during this slowdown than in previous contractions as demand from overseas continues to grow. In February 2001, a month before the last recession, the Institute’s index was 42.1.
Yet the price problem creates the greatest challenge. The ISM Prices Index registered 84.5 percent in April, showing manufacturers are paying higher prices on average when compared with March. This is the highest reading for the index since it registered 86 percent in May 2004, says the ISM.
Though last week, prices for commodities dropped slightly, the outlook calls for more increases. “Chile’s worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world’s biggest mines,” according to a Bloomberg News report.
Therefore, goods producers are caught between suppliers requiring more money and consumers who have less confidence in many businesses who continue to shed jobs as a catalyst for cost cutting. Depending on how much cash they have, there’s only a limited time before producers will stop subsidizing consumers who will only buy at the lowest price.
The manufacturing contraction results partially from events that started last year. “(ThomasNet.com, 05/06/08.)
So where are things today with the Purchasing Managers Index? According to Forbes, the latest news shows another drop in June 2008, which is a contraction for the fifth straight month.
