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IHS Markit PMI data signal GDP growth rate of 2.5% in fourth
quarter
Jobs growth of 185k indicated alongside steady upward price
pressures
The November flash IHS Markit PMI surveys brought further
evidence that the US economy is enjoying a strong fourth quarter,
showing resilience in the face of a wider global slowdown and
escalating trade war worries.
At 54.4, the flash estimate of the IHS Markit U.S. Composite
PMI™ Output Index fell from 54.9 in October, but remained at
a sufficiently elevated level to indicate that the economy is
continuing to grow at a robust pace.
Comparisons with official data suggest that the average PMI
reading for the fourth quarter so far is indicative of GDP rising
at an annualised rate of 2.5% (see below). Such solid growth is all
the more impressive when taken in the context of the 4.2% and 3.5%
rates of expansions seen in the second and third quarters
respectively, which had already signalled the best back-to-back
quarterly performances of the US economy since 2014.
While an easing in employment growth was evident from the flash
PMI composite jobs index during the month, the overall level of the
index likewise remained elevated by historical standards,
suggesting that further robust hiring persisted into November. The
PMI's Employment Index has exhibited a 95% correlation with monthly
non-farm payroll changes over the past decade, highlighting the
accuracy of the survey model in terms of its job growth estimates.
The November flash reading is indicative of a 185,000 non-farm
payroll rise.
Simple GDP nowcasting using the PMI
Monthly PMI values can be used to accurately predict quarterly
GDP growth rates in advance. To highlight this 'nowcasting' value
of the PMI, a simple OLS regression is used where the PMI output
index (covering both manufacturing and services) is the sole
variable used to explain the official GDP growth rate. However, as
Fig 1 below shows, GDP have in the past tended to suffer from undue
volatility, mainly in the first quarters of each year between 2008
and 2014, thought to be due to the official data not fully
capturing seasonal influences (depicted by orange bars). The PMI
should not be expected to predict such errors and the inclusion of
such 'outliers' would only distort the model and resultant GDP
estimates.
One solution is to take averages of the GDP for the periods
around the suspected 'outliers', as shown in Fig 2. This process
lifts the correlation of GDP with the PMI from 74% to 86%,
therefore improving the model's predictive power for future GDP
estimation. The adjusted r-square of the outlier adjusted model is
0.75 against 0.55 without the outliers removed.
Manufacturing resilience
Given the escalating trade conflicts in recent months, it was
especially reassuring to see manufacturing growth hold up well in
November. The flash survey results showed manufacturing output
continuing to rise, increasing at a rate commensurate with the
official gauge of output growing at an annualised rate of
approximately 1%. While this represents a slowdown from the prior
two months, an increase in new order inflows suggest demand remains
encouragingly strong. New orders in the manufacturing sector grew
at the fastest rate for six months according to the flash survey
results. The disparity between slower output growth and increased
inflows of new orders could also in part be explained by capacity
constraints limiting production growth in the short term.
The manufacturing PMI survey's Output Index and New Orders Index
both correlate well with the comparable official manufacturing
growth rates, exhibiting correlations of 89% and 76% respectively,
in both cases only diverging from official data to any significant
degree in 2014-15 (a period when the official data displayed odd
volatility).
Upward price pressures
With the economy growing at a solid rate and still generating
jobs in strong numbers, it was perhaps not surprising to also see
price pressures remaining elevated. At 56.9, the composite Input
Price Index from the two sectors slipped to a three-month low,
according to the flash November reading, but as our comparison with
PCE inflation shows, the current level remains indicative of annual
PCE inflation slightly in excess of 2%. Tariffs were again widely
blamed on price rises, alongside increasing energy and wage
costs.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
