Seriously The Times, Get The PMIs Right Will You

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770

The Times reads the purchasing managers index – the flash composite for the US – and manages to get the reading entirely wrong.

This is not knowing the difference between velocity and acceleration:

Business activity in America has fallen to its lowest level in more than six years as the coronavirus crisis ruptures supply chains and suppresses demand.

No, it hasn’t. Not even close.

Overall US output has fallen into contraction for the first time since October 2013, the latest purchasing managers’ index shows, with the services sector coming under particular pressure.

That is correct. The full report is here:

Flash U.S. Composite Output Index at 49.6 (53.3
in January). 76-month low.
▪ Flash U.S. Services Business Activity Index at
49.4 (53.4 in January). 76-month low.
▪ Flash U.S. Manufacturing PMI at 50.8 (51.9 in
January). 6-month low.
▪ Flash U.S. Manufacturing Output Index at 50.6
(52.4 in January). 7-month low.

And:

US composite flash PMI

Just so’s you all unnerstan’.

If we want to know what GDP is going to be like in next month’s figures we want to know what people are making now. Everything that is made is made from something. So, go ask the people who buy the things stuff is made from – the purchasing managers – what they’re buying this month to make things from next month. Set that to an index, more than 50 means expansion, less than 50 means contraction.

As the chart there shows it’s a pretty – not wholly – accurate advance reading of what GDP is going to be.

Cool, eh?

So, what’s the Composite (ie, services and manufacturing together) and Flash (compiled from about 85% of the survey responses, not all of them) PMI telling us? That this month’s economic activity is a little less than last month’s. OK.

What’s The Times trying to tell us it says? That business activity this month is lower than it was 6 years ago:

US GDP

That US GDP has fallen, in one month, from, $21.7 trillion (on an annualised basis) to $16.6 trillion (again, annual basis). That is, a 23% fall in GDP in one month.

Or, to put this in context, the Great Depression has just happened – or is just happening – over the past 30 days and no one has noticed. Further, that’s happened because 2,700 people have died of a new form of ‘flu while the regular annual deaths of half a million people from the normal ‘flu don’t have that effect.

All The Times needed to do to get this right was add the one word:

New business activity in America has fallen to its lowest level in more than six years as the coronavirus crisis ruptures supply chains and suppresses demand.

Or perhaps a couple:

Growth in business activity in America has fallen to its lowest level in more than six years as the coronavirus crisis ruptures supply chains and suppresses demand.

Even:

Change in business activity in America has fallen to its lowest level in more than six years as the coronavirus crisis ruptures supply chains and suppresses demand.

Details are important, ya kno?

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Quentin Vole
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Quentin Vole

Although the total deaths from coronavirus are insignificant in a global context (or even compared with China’s gross mortality rate of 50,000 a day), and for my money are likely to remain so, there’s going to be a non-significant effect from government reaction to the problem. Several Chinese provinces are already more or less shut down – that’s a pretty significant knock to GDP, and not just confined to China either, as supply chains get disrupted.

HJ777
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HJ777

The Guardian and the BBC have made exactly this mistake before in their reports (i.e. not understanding the different between the absolute level and the change in level) on the economy and I have had to email them to ask them to correct their mistakes.

To be fair, the BBC responded by changing theirs quickly. The Guardian didn’t, probably because they didn’t understand what I meant.

HJ777
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HJ777

Or even difference!