The Purchasing Managers’ Index is a composite index based on data from a monthly report known as “The Report on Business,” compiled and released by the National Association of Purchasing Management based in Tempe, Ariz. This is one of the few significant reports compiled by an agency outside the government.
There are two reasons for this: Its broad coverage of the manufacturing sector and its timeliness. The association’s report is released the first business day following the month it covers and is used by analysts to help project government-produced economic indicators related to manufacturing and industrial production in particular.
The index is based on data from a survey mailed to about 400 purchasing managers in the manufacturing sector on five different fields. The survey is mailed by mid-month and responses are tallied around the 21st.
Survey members are asked to provide information on various facets of their firm’s manufacturing activity. Questions cover five key categories: production, new orders, inventories of purchased materials, employment and vendor deliveries. For most categories, the possible answers essentially are equivalent to “better,” “no change” or “worse.” For vendor performance, replies are in terms of “faster,” “same” and “slower.” For supplier deliveries, slower is a positive for this component.
By the association’s own definition, an overall index above 50 indicates an expanding manufacturing sector and a number below 50 suggests a generalized contraction. As such, the index does not report precise levels of activity but instead indicates whether a given month is better or worse than the preceding one.
Even though many Western countries have smaller manufacturing industries, many people in the economic world know that recessions and decreases in Gross Domestic Product get their start from a weak index. Therefore, when the index is less than 50, there is a hint that the GDP may weaken and the risk of recession is greater.
Quote of the Week: “Early and provident fear is the mother of safety.” – Edmund Burke
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.