Manufacturing PMI

Economics and Currency

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Curriculum Content

Leading/Coincident/Lagging: Leading Economic Indicator
Type: Survey, Index (Above/Below Index Number)

Summary: Manufacturing PMI (or Manufacturing Purchasing Manager’s Indexes) are surveys sent each month to the largest manufacturing firms in the nation. It scores manufacturers outlooks on the economy. Manufacturing PMI lead GDP with a substantial time lag of between 8 months and 18 months depending on the nation. Their answers include many areas like New Orders, Current Production, Employment, Supplier Deliveries, Inventories, Prices, Order Backlog, Imports, and New Export Orders. A reading above 50 means manufacturing is expanding. A reading below 50 means manufacturing is contracting. Below either 50 or 40, depending on the issuer of the report, the GDP of the economy will likely contract. The primary creators of PMI reports are Markit Economics and the American Institute for Supply Management. Certain nations, like China, create their own PMI reports.

The business cycle is fully represented in the range of PMI numbers. The existing trend is the most important consideration, followed by peaks and troughs. If the number peaks at a higher range number and trends down you should expect slowing in GDP and deflation, especially near 60. If the number bottoms at a lower number and trends upward, you should expect accelerating GDP and inflation, especially near 40. Limits are due to central banks controlling against overheating or failing economies.

Manufacturing PMI (MPMI)	Change Versus Previous
MPMI over > 50, RGDP Rises.	MPMI accelerates, GDP rises quicker.
MPMI under < 50, RGDP Falls.	MPMI slows, GDP rises slower.
MPMI over > 50, Inflation Rises.	MPMI accelerates, Inflation rises quicker.
MPMI under < 50, Inflation Falls.	MPMI slows, Inflation rises slower.
If MPMI is too High, Central Bank likely to…	Hyperinflation Risks, so raise Interest Rate.
If MPMI is too Low, Central Bank likely to…	Deflation Risks, so lower Interest Rate.
All information is general, not absolute. Invest using total economy, not one indicator.
RGDP = Real GDP

Impact on Local Currency: Healthy Economies see currency value increases with Manufacturing PMI above expectations from foreigners buying the currency to purchase assets based on future gains from the leading indicator. Foreigners are scared by poor or below expectation Manufacturing PMI releases and may reduce currency exposure, selling out of the market and out of the currency.