Purchasing Managers Index: Macroeconomic data to track economic conditions

Be fearful when others are greedy and greedy when others are fearful. ~ Warren Buffett

Ever mindful of the dangers of extrapolating personal experiences to larger trends in the economy, I take care to corroborate my own observations with macroeconomic data. So you can consider doing the same, I’m going to introduce you to a few of my favorites sources over the next few blogs.

Today, we’ll start with the Purchasing Managers Index (PMI).

The PMI, produced by the Institute of Supply Management (ISM), is derived from surveys of purchasing managers who are asked about new orders, inventory levels, supplier deliveries, the employment environment, and production. When the PMI is greater than 50, it is interpreted to mean the manufacturing sector is expanding (when compared to the previous month) and when it is less than 50, it is contracting.

Although one can simply view historical data over at Ycharts, I find it more valuable to head over to the monthly ISM report to read the summary paragraph and comments left by respondents.

Here, for example, we learn that in March of 2018 the ISM index was 59.3 and:

• New orders, production, and employment growing
• Supplier deliveries slowing at slower rate
• Backlog same raw materials inventories growing
• Customers’ inventories too low
• Prices increasing at faster rate
• Exports and imports growing

From the comments left by survey respondents we learn that in the machinery sector there is:

Much concern in the industry regarding the steel and aluminum tariffs recently [imposed]. This is causing panic buying, driving the near-term prices higher and [leading to] inventory shortages for non-contract customers.

Someone in the food, beverage, and tobacco products sector advises us that:

In the U.S., we continue to struggle with finding carriers and drivers for shipments.

And according to a respondent from the transportation sector:

Production targets continue to be a struggle due to shortages of globally sourced components. Many subtier components are in short supply for multiple OEMs.

It is important to note that, although the PMI cannot tell us if/when the market/economy is going to “correct,” because all of the struggles experienced by the manufacturing sector ultimately show up in the prices of the goods we buy it does it serve as an excellent leading indicator of where things may be heading in the absence of such a correction. As such, whether you manage a household or business, the PMI can offer up useful information when making decisions.

So, the next time you’re on the fence about whether to invest in a car/equipment this year or next year, sign a long-term contract with a customer, or build a cabin in the woods from scratch or buy one that’s gently used, consider taking a look at the PMI report to inform your decision-making process.

On that note, an excellent time to check out for the week and leave you with a song for our Manufacturing Peace of Mind™ playlist. Having run out the door this morning with a piece of toast in one hand and espresso in the other, today I’m going to leave you with a song off of Courtney Barnett and Kurt Vile’s collaboration Lotta Sea Lice titled “Continental Breakfast.” Hope you like it as much as I do.

Cheers…xian

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