By Mark Okada | February 29, 2016
With the volume and speed with which information is exchanged, it has become increasingly challenging to sort through the data available and determine what is and isn’t significant—or as we like to describe it, what are signals and what is noise.
We view the Purchasing Managers’ Indexes (PMIs) that are released monthly by ISM and Markit Group as key signals, as they present one of the more accurate global pictures available, representing economic activity both across sectors and around the world.
February PMI numbers come out starting Tuesday, March 1 and will be released throughout the week. These will be key indicators about where the global economy is headed.
Here are a few things we’ll be looking for in these numbers:
– Do PMIs reflect market sentiment?
One reason we see PMIs as a valuable signal is because they’re based on actual business conditions as opposed to sentiment. The stock market, on the other hand, is largely based on the latter. With the volatility we’ve seen in stocks to start the year, many people are uncertain about the state of the economy. (Ironically, that uncertainty increases the volatility.) PMIs can provide much needed clarity about the health of the economy and determine if the sentiment-driven activity is objectively justified.
– Is China’s economy causing problems globally?
PMIs from January, along with the data from 2015, showed a slowdown in global economic activity. While many assume China was the cause of that, the US actually played more of a role in bringing down Global PMIs than China. If China were causing major issues, we would see that acutely reflected in PMI data from the Eurozone and Japan as well. Thus far, that has not been the case; however, notable declines in February PMI numbers in those two regions could be signs of a ripple effect from a slowdown in China.
– What is the likelihood of a US recession?
PMIs are proven leading indicators for recessions. While not all substantial declines in PMIs result in recessions, all recessions in the past six decades in the US were preceded by major PMI declines. Recent PMIs show that while the US economy is continuing to grow, it’s doing so at a slower rate. So while we don’t see an economic recession on the horizon at the moment, the upcoming PMI numbers will tell us if growth is slowing enough to change that view.
The views and opinions expressed are for informational purposes only and are subject to change at any time. This material is not a recommendation, offer or solicitation to buy or sell any securities or engage in any particular investment strategy and should not be considered specific legal, investment or tax advice. There is no guarantee that any of the forecasts will come to pass. Past performance is no guarantee of future results.