A PMI is a useful way of predicting how the economy is going to be doing a couple of months from now. The US PMI for manufacturing has fallen – that means disaster ahead, right? Well, no, not really, it’s actually a pretty unimportant number. Because manufacturing is a pretty unimportant sector of the economy.
Yes, yes, I know, that’s not what everyone thinks but it’s true all the same. This is of mild interest but it’s not important:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] U.S. manufacturers continued to struggle in March, IHS Markit’s preliminary read of its manufacturing purchasing managers’ index showed on Friday, with the index tumbling to its weakest level in nearly 2 years as the global economy shows broad signs of weakness. The flash U.S. Manufacturing PMI slid to 52.5, down from 53.0 in February. A consensus forecast of economists expected the index to check in at 53.5. A reading above 50 denotes the manufacturing sector is still expanding. [/perfectpullquote]
In order to make stuff people have to go buy stuff to make stuff from. So, ask the purchasing managers what they’re buying to make stuff from. That gives you a pretty good idea of what’s going to be made – output, or the size of the economy. That’s the PMI, the purchasing managers’ index. We set it up so that 50 means this month is the same as last, no change in output. Below 50 says output is shrinking, above 50 expanding. The reading here is that the rate at which it is expanding is slowing down. Not hugely worrying to start with:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The IHS Markit flash purchasing managers index for manufacturing in March fell to a 21-month low, while the services PMI weakened to a two-month low. The flash manufacturing PMI fell to 52.5 from 53 in February, while the services PMI fell to 54.8 from 56. [/perfectpullquote]
But here’s the thing. Manufacturing is some 10%, maybe 12%, of the US economy. Such a small part slowing a bit isn’t all that much of a problem. The services one covers near 80% of the US economy. We’re really very interested in the services PMI therefore (the balance is primary industries, mining, maybe electricity etc).
The reason the manufacturing PMI doesn’t mean very much is because manufacturing doesn’t mean very much these days. That we do all pay attention is really just a hangover from when it was all a much larger portion of the economy.