What the purchasing managers say
Investors have reacted with caution as recent economic news has proved to be lacklustre.
Much significance has been placed on purchasing managers’ indices (PMI) – they are straightforward, timely and internationally comparable, and they correspond to the broad swings of the business cycle. In the UK, the headline manufacturing PMI recorded a further fall from 54.4 to 52.1 in May, its lowest reading since September 2009. Some of the fall is being attributed to special factors, such as the additional UK public holiday at the end of April, but the PMI has been easing since February, symptomatic of a loss of momentum in the hitherto rapidly growing manufacturing sector.
In the US, the recent decline in manufacturing PMI has been one of the sharpest on record. Policy tightening in China, the supply shock stemming from Japan’s earthquake and tsunami and the spike in oil prices have all taken their toll. The European sovereign debt crisis has further damaged sentiment. However, after the 1995 earthquake in Kobe, the US PMI fell more than 11 points in five months, showing the extent of the supply chain effect. This is significant because Japan’s rebuilding effort has been underway for some time. Toyota, for example, expects to be operating at 90 per cent of normal capacity in June, up from the 50 per cent level it had projected for May.
Manufacturing also represents less than 13 per cent of the UK’s GDP and only around eight per cent of jobs (and this will limit efforts to ‘rebalance’ the economy meaningfully); similarly in the US, manufacturing represents 12.9 per cent of GDP. Purchasing managers are among the first to know when trading conditions change. An index reading of 50 represents ‘no change’, a number over 50 indicates an improvement while anything below 50 suggests a decline. So a sustained drop below 50 is often deemed by forecasters to signal a recession. But there have been several false signals for every correct signal. There is no substitute for hard data such as payroll employment and industrial production.
At some point in an economic expansion business might be great, but no greater than the month before. When that happens, the index will tend to cycle back down towards 50. So the softer PMI data which we are seeing does not necessarily portend disaster. At the time of writing, they all remain solidly above 50.
James Codrington, head of charities, Barings
Author: James Codrington
James Codrington heads the charities team at Barings and is a member of the targeted Return Group.
He joined Barings in 2002 and has 14 years' investment experience.
He has an MBA in Mordern History from Oxford University and is a regular speaker at charity events.
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