Are ‘Flash PMIs’ a Useful Economic Indicator?
There’s a new economic indicator in town, and not everyone is eager to welcome it.
Markit has just begun to put out what it calls a “flash” estimate of U.S. manufacturing activity — that is, an early glimpse of the Institute for Supply Management’s closely watched monthly gauge.
The ISM’s (Institute for Supply Management) gauge is not a measure of actual production but rather a sentiment gauge of purchasing managers in the sector (hence “PMI,” which is shorthand for “Purchasing Managers Index”).
It has a long history — dating back to 1947 — and a decent track record of calling turning points in the broader economy. Because of this, and its timeliness, it tends to be one of the more market-sensitive data releases each month. Its popularity has in turn spurred the development of a whole host of similar PMIs for manufacturing and service-sector activity worldwide, and now “flash” estimates for these data points typically released a week or two ahead of the official or final reads.
Count the folks at High Frequency Economics as among those who aren’t happy about it.
“We hate the privately compiled PMIs,” the firm said in a recent client note, citing both unclear correlation's with actual economic performance and the relatively short time these indicators have been around.
“It is dangerous to bet on one series correlating with another on the basis of such a small sample [of 72 observations],” the economists cautioned.
Others disagree, noting that despite their youth the privately compiled PMI estimates have done a pretty good job of predicting the final or official gauges. For the U.S. in particular, “the simple correlation coefficient between the two is 0.91, meaning that just over 90 [percent] of the moves in the flash PMI are reflected in the actual PMI,” notes Paul Dales of Capital Economics. “Yes, the flash PMIs are predictive,” adds Jens Nordvig of Nomura Securities, who keeps a close eye on the global series.
“In our view the flash PMIs are a very useful gauge of the final PMIs,” says David Mackie, head of Western European Economic Research at JP Morgan . And the final PMIs themselves, in his view, “are the best real-time indicator of growth momentum,” so any early clues to their findings take on additional import.
That, of course, may be cold comfort at the moment, given that the flash PMIs for Europe and China remain mired in contractionary territory; Markit’s new U.S. gauge (which was launched with a few years’ history), meanwhile just posted its weakest reading in 19 months. Investors may not like the message from this newcomer, but it would seem they ignore it at their own peril.
-By CNBC's Kelly Evans