Purchasing managers’ indexes a guide for slowing economy
By polling those who sit in centre of supply chains, PMIs can provide an early warning
The global economy’s stumbles over the past year have been no surprise to the world’s purchasing managers and the people closely following the economic indexes that are produced from their views.
Global purchasing managers’ indexes, or PMIs, have come forth as a leading barometer of the health of the world’s major manufacturing sectors. Through most of last year, official forecasts like those from the Federal Reserve or International Monetary Fund held steady, and until the fourth quarter, the stock market climbed upward. But one of the earliest and clearest cracks in the global economy was sitting in plain view—the world’s purchasing managers were seeing weakening demand, slowing orders and signs the U.S. wouldn’t escape the downward pull. PMIs have proliferated around the world. They track most major economies and work by polling the people who sit in the center of a company’s supply chain and make decisions about whether to order more supplies, or change inventories or prices to meet shifting demand for a company’s products.
“These are the people that see the demand pressure first and have to respond to it,” said Tim Fiore, the chief procurement officer for Ryder System Inc., a truck leasing and fleet-management company, who also oversees the PMI survey produced by the Institute for Supply Management. “They’re tied into production and have to respond when new orders come in.”
Over the past year, purchasing managers sounded an early and persistent warning: The health of the global economy, especially its manufacturing sector, was sputtering.
“We’re in a unique position in many companies; no one has as much finger on the pulse,” said Mr. Fiore.
The warnings came from Europe as PMIs in the euro area, produced by research firm IHS Markit, started losing steam in early 2018. As the year continued, the index in Europe con- tinued to slip. JPMorgan’s Global Manufacturing PMI also started losing ground. The Caixin PMI in China stumbled in March of 2018.
Official data followed. Europe’s GDP reports weakened, and some like Germany and Italy turned negative by the third quarter. China’s official numbers followed the PMI downward.
The National Association of Purchasing Agents began the original PMI in the 1930s, asking members about business conditions and sharing information with the Chamber of Commerce, Federal Reserve and others in Washington, during a period of intense interest in economic barometers during the Great Depression.
NAPA eventually became the Institute for Supply Management. Its index has stayed quite comparable for over seven decades.
It was an American endeavor until Chris Williamson, an economist at the British firm NTC Research, grew frustrated with lags in U.K. economic data. He approached ISM and asked if he could review their methodology to develop a PMI for Britain in 1992.
The basics were quite similar: a series of simple questions about whether production, new orders, prices, backlogs and so on were up, the same or down.
The U.K. index gained popularity. Other countries wanted indexes too. But with largescale high-frequency surveys being expensive to compile, NTC hit on the model of sponsorship. The news agency Reuters sponsored surveys in a number of economies. NTC built the index and Reuters helped pay for the survey and popularize coverage of the indexes. The Japanese news agency Nikkei covered some. Now, banks sponsor a number of them—JPMorgan, for example, backs the global manufacturing PMI.
Mr. Williamson likened sponsorships to companies putting their names on sports stadiums—they don’t pick the play- ers and certainly don’t pick the score. Through a series of merger and acquisition activity, NTC became IHS Markit. Today, it produces most PMIs with sponsored partners. It produces its own U.S. index that is directly comparable with its other international indexes.
China’s National Bureau of Statistics oversees its own, as do groups in Switzerland, Denmark, New Zealand and Israel. This explains why anyone tracking global economic data sees an apparently bewildering list of PMIs. The ISM still runs its original.
“There isn’t anything comparable to these things, and that is one of the reasons we love them so much,” said David Hensley, the managing director of global economic research at JPMorgan.
The indexes from different providers are similar, but not identical, which is how the outlook for the U.S. in 2018 became muddled. Over time, IHS Markit and ISM’s twin indexes for the U.S. tell a similar story. But sometimes they’ll differ for stretches, and 2018 was such a period. IHS Markit’s index began to lose steam early in the summer, while ISM’s hit a new peak in August.
The original and longest-lasting PMI from ISM told one story; IHS Markit’s PMI, with a shorter history but a giant international footprint, told the less-upbeat story. American trends were holding up better than most of the world, but clearly slowing.
This divergence wouldn’t last. Both measures fell sharply in December and enjoyed modest rebounds in January. Both now tell the story of a U.S. manufacturing sector that slowed at the end of 2018, but not as much as others. Globally, manufacturing has lost more steam—the current global reading is the lowest since 2016, and barely above the dividing line between expansion and contraction.
PMIs for China, Germany, Italy, Turkey, South Korea and Colombia are among those contracting in January.