A Lesson In PMIs: Relative Vs. Absolute

If we were to take these PMI estimates at face value, looking at them as indications of absolute levels rather than attempted guess related to relative changes, the US manufacturing sector in the months ahead would have to look like what you see above.

That’s not even remotely indicated by anything – including these PMI numbers where they are now. Even in the upper half of the 50s, they are simply way, way too low for the established conditions of 2020. You can see what I mean in the US IP estimates for manufacturing.

Therefore, all they mean is that the US economy seems to be rebounding at a relatively low rate; which, following a big downturn, leads to an entirely different set of circumstances. The US isn’t booming in a way Europe is not, rather Europe is falling apart already in a way that the US still could.

Where are the high 60s? Where are the 70s? Markit’s US PMI’s have inched closer to the low 60s, but that doesn’t even mean what little it had in 2017 and 2014. Things have changed, for the worse, and the worse things have gotten the higher PMI’s have to rise in order to indicate whichever economy is meaningfully improving.

In a lot of recent historical cases, rising PMI’s are pretty much all there is. Given that they indicate relative rather than absolute changes, no wonder there is so much confusion about what they mean (and that, apparently, includes Economists working for the companies that produce them). Even if the ISM’s numbers in 2017 had meant what everyone had said they meant, they were still nowhere near enough to keep 2018 from becoming 2019.

That was because in 2017 they hadn’t meant that at all. And now in 2020, we wish it was still 2017.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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