My past two discussions centered on housing starts and the Composite Leading Index as indicators of the health of the U.S. economy. Let’s dig deeper and examine another measure of the economy.
Purchasing Manager Index
The Purchasing Manager Index (PMI) is a gauge of how well the manufacturing industry in the economy is performing. Granted, the service sector dominates our economy with 70% driven by this segment; however, the PMI as an index of the manufacturing base is a lead indicator to reckon with.
If you hear that the PMI is above 50, this bodes well for the economy and shows it’s expanding. During the go-go years between 2002 and 2005, this index was in the range between 54 and 66 with the latter number being the highest on record.
However, if this index declines below 50, but above 42.7, it is a sign of a slowing economy, but still above recessionary rates. If the number reported is below 42.7, it is a sign of a recession. For example, during the last deep recession of 1990-1991, the PMI was reported at 40.8.
Where do we stand in the current economy? In the last four months, the PMI has been below 50. It dropped below 42.7 in October. For November, it stands at 36.2. This is the lowest reading since May 1982 when the PMI registered at 35.5. This is just another sign the bad and ugly are overcoming the good in the economy right now.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.