Purchasing managers’ indices are considered excellent forward looking indicators, as they reflect growth prospects. Usually, there is a nice correlation between PMIs and future growth, often with a two month lag.
However, an example from a very developed country casts doubt on validity of PMIs, especially in turning points.
Sweden reported a contraction of 0.1% in its GDP in Q2 2013. This came as a big surprise, as PMIs have been positive. The year over year growth rate of 0.6% was half the early expectations. Sweden is a very developed country and measuring is considered reliable.
- In the euro-zone, close to Sweden, improving PMIs in Germany and France were followed by positive GDP reports for Q2, and the correlation continues working out very well. In Q3, Germany saw even stronger PMIs, but there are doubts that growth will remain strong, or if Germany can pull the whole euro-zone forward.
- In the US, PMIs have been positive most of the time, especially in the services sector: the vast majority of the US economy. However, this hasn’t been followed by strong growth. Fortunately, job growth has been a bit more upbeat.
- In the UK, the superb PMI was recorded after the strong growth. Is it a late indicator in this case? Or is the UK set to grow even faster in Q3?
- In China, there has been a gap between the official manufacturing PMI, and the Markit / HSBC one. Most of the time, the official one is better.
Are the PMIs seeing continued strength in the euro-zone and in the UK? Or are the PMIs somewhat late and making too much out of the current strength? What about the US?
Can the developed world push forward while emerging markets are slowing down? This is a message we can read from the PMIs, but the message might be mistaken.
There are more questions than answers.
Further reading: How to trade forex with pivot points