V Or L In The Mechanics Of PMI’s

The thing about PMI’s is they are all second derivative. The focus on fifty is misleading, beginning with the idea that these things can ever be so precise as to clearly delineate the exact moment between contraction and growth.

When the indices are high, say like 60 or better, that simply means many more respondents are claiming to see increasing levels of activity (or prices, whatever). No word on how much or how fast the increases.

When it gets down to 40 or even 30, the same thing but contraction.

Falling very low, however, you’d have to expect to see an equal and opposite turnaround to identify when conditions are truly getting better.

If, for example, the ISM’s Manufacturing Index dropped all the way to 41.5 one month (April 2020) but then rebounded to 43.1 the next (May 2020), all that means is a small number of respondents have switched their responses. A few more aren’t saying they are seeing lower levels of activity (or prices). Most still are.

What that likely means is the overall contraction is still contracting, just not in quite the same uniform manner. That could mean the beginning of a turnaround, as one might assume, but even if it does this tells us almost nothing about what kind of a rebound it might be.

Since these surveys don’t give us any sense of degree, a few more switching out of the “lower” side might only mean they’ve stopped seeing declines. It doesn’t actually give us any sense of just how high any higher levels might be.

It’s the same problem we’ve encountered before, back in 2017 and 2018 when the ISM, in particular, was through the roof in a way nothing else except the unemployment rate had been. These measures were designed for a symmetric economy, one in which the business cycle recovery actually meant recovery.

The PMI’s didn’t need to ask about degree because in the past it was implicit in the turnaround; once the bottom was reached growth would rapidly return to normal. What if there was a “new normal?”

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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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