April 10, 2009

I ended my last post, The Challenge In Forecasting - Looking at the Right Data in the following way:

“Perhaps business people just need to follow the right data, in order to forecast where business is headed. By looking at the right data, the business outlook may look very, very different.”

Do you want to know how the economy will look in the near future? Let me look into the crystal ball. . . The short answer in Twitter style:

“To @marcyshinder & Open Forum readers: Economy is going in the right direction, but it will take time before breaking even at a PMI index of 50.”

Let me translate the above short Twitter-style message into a longer discussion:

As a historical background, the Purchasing Managers’ Index (PMI) has been used by a former financial “hotshot” by the name Alan Greenspan. This article — Why Greenspan Focuses on Business Buyers — points out how former Fed Chairman Greenspan followed the Purchasing Managers’ Index:

“The report that Greenspan loves to watch is called the Purchasing Managers’ Index (PMI). Based on data from 350 to 400 NAPM members working in manufacturing, it ‘has a fairly robust track record of accurately predicting trends in the economy,’ says economist Joseph Liro of consultants Stone & McCarthy Research Associates in Princeton, N.J. For instance, the PMI turned downward a year before the 1990-91 recession. It also signaled the factory slowdown in 1997 and 1998, when the Asian financial crisis cut into demand for U.S. Exports.” (BusinessWeek, June 5, 2000.)

The Purchasing Managers’ Index is so prescient and important for predicting economic trends that here in Sweden we have been discussing at the Swedish National Association of Purchasing and Logistics (Silf, Western Region) how to make the Swedish version of PMI as popular as the American original. (See March 2009, PDF; the Silf Purchasing Manager’s Index and Swedbank’s Purchasing Managers’ Index).

Let me give you an example of how you can use the PMI to understand the economy, using the current PMI in Sweden. In Sweden, the PMI index rose from 33.9 in February to 36.7 in March 2009. That is a positive sign, but it is still long way to go, before it is reaching the break-even level of 50.

My recommendation is to spend some time on the U.S. version of the PMI index in order to get an overall picture of the economy.

Look back some years and see how the index has gone from growth to decline. With this index at hand, you could come up with a qualified guess and predict what will come in the near future. If you want to learn more about the PMI, go to Markit Group Limited’s site.

I want to end on a positive note, using an excerpt from Purchasing Magazine, (Purchasing’s business conditions, buying plans indexes continue up):

”While many purchasing professionals indicated in the most recent Purchasingdata.com survey that their businesses continued to struggle, there were some survey respondents that are seeing the early signs of an increase in business. ‘Incoming orders have been slow the past few months but seem to be picking up slightly,’ said the purchasing manager at a building products company in Mississippi in the March survey.

‘The downturn in our business has flattened out and we are holding steady, looking forward towards the future,’ said an optimistic plant manager at a container plant in New Jersey.” (Purchasing.com, April 9, 2009.)

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About the Author: Martin Lindeskog is a “trader in matter & spirit” and a small business entrepreneur in Gothenburg, Sweden. He is a board member of the Swedish National Association of Purchasing and Logistics (Silf, Western Region). Martin also writes a long-standing blog called Ego and will soon start a new series of interviews for his podcasting show on the Solid Vox network.

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