THE TWO PMIs AND THE FED
The Purchasing Managers Index (PMI) is a measure of manufacturing activity that has become widely followed in the last five years or so. I’ve used PMI data in research for some time, though. I’ve always liked the PMI, because it gives us a view of the economy from those actually working, it is not revised backwards, and it comes out one month in arrears.
But not all PMI data is the same. For the US, there are two indices. The first, published by the Institute for Supply Management (ISM), has a long history going back to 1948. A more recent PMI is published by Markit, which started in the UK but now publishes PMIs for over 30 countries, including the US. The Markit US PMI uses the same survey data as the ISM (through a mutual agreement), yet the results are not always the same.
The media tends to pick and choose which version they use, so when the two indices diverge, they choose the one that seems to fit the current narrative about markets. This month, the Markit US PMI rose, indicating an acceleration in manufacturing. The ISM version declined, indicating a slowdown in manufacturing. Importantly, both were signaling that we are still in a manufacturing expansion. Yet, the media latched onto the message that the US was slowing, signaled by the ISM PMI, and mostly ignored the Markit PMI. In other months, that’s been reversed. So what are the differences between the two PMIs, and what does it mean when they diverge?
Both PMIs survey purchasing managers in five categories: new orders, production, inventories, employment, and delivery times. The ISM equally weights the five categories, while Markit gives more weight to new orders, production and employment. Markit states that these categories are more forward-looking, so their weighting scheme makes the PMI more of a leading indicator than a coincidental one.
If this is true, the current divergence suggest that while the US economy is slowing (ISM’s result), the prospects still look good for the future (Markit’s result), and the US economy is still growing at a strong pace (both indicators). But even the ISM PMI indicates that the Fed will need substantial rate hikes if they intend to ease off the monetary accelerator. That is not the story being shared, but it’s the important takeaway from the two PMIs.
Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© First Quadrant, LLC, 2022. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, LLC, only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.