This morning the Institute for Supply Management announced that the Purchasing Managers Index (PMI) had risen to 52.7 in November from 50.8 in October:
http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942
The PMI measures purchasing managers' impressions of the economy's strength based on their experience buying inputs for their firms. A number below 50 indicates a contracting economy; a number above 50 indicates an expanding economy.
Purchasing Managers' Index
(Click on chart to enlarge)
(Recessions shaded)
Inventories
(Click on chart to enlarge)
(Recessions shaded)
The charts indicate the correlation between inventory expansion and the PMI. Manufacturing production slumped during the recession as businesses sold goods out of inventory and cut production. That is, businesses liquidated their stocks on hand as sales slowed. Consequently production fell faster than sales and the PMI slumped as purchasing managers reduced their orders for inputs.
Businesses rebuilt their inventories as the recession ended. Production recovered as a result and the PMI bounced back strongly. Now, however, inventory buildup is over and manufacturing production no longer has that additional boost. The PMI has been hovering at just above 50, and November's 52.7 is no cause for elation.
We can't reasonably expect a jump in production and the PMI until demand improves significantly.
(To be fully informed visit http://www.beyourowneconomist.com/)
© 2011 Michael B. Lehmann
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