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The suppliers' delivery times index from IHS Markit's PMI
business surveys captures the extent of supply chain delays in an
economy, which in turn acts as a useful barometer of capacity
constraints. The index therefore helps gauge the degree to which
the current demand/supply environment is indicative of either a
buyers'- or sellers'-market, and hence provides valuable
information on developing inflation trends.
How is it calculated?
Purchasing managers participating in IHS Markit's PMI business
surveys, conducted in 44 countries, are asked if it is taking their
suppliers more or less time to provide inputs to their factories on
average. The precise question wording is:
"Are your suppliers' delivery times slower, faster or unchanged
on average than one month ago?"
Companies are also asked to provide a reason for any change, if
known.
The percentage of companies reporting an improvement,
deterioration or no change in delivery times are weighted to derive
a 'diffusion index' as follows.
INDEX = (percentage of survey panel responding 'Faster') +
(percentage responding 'Same'*0.5)
Hence readings of 50 indicate no change in delivery times on the
prior month, readings above 50 indicate that delivery times have
improved (become shorter, or faster) and readings below 50 indicate
that delivery times have deteriorated (become longer, or
slower).
The index is also seasonally adjusted to strip out normal
variations in delivery performance for the time of year (we use the
widely-used US Census Bureau X-12 ARIMA software for removing
seasonality).
In each country, the panel of companies is carefully selected to
accurately represent the true structure of the chosen sector of the
economy as determined by official data. The survey panels therefore
replicate in miniature the structure of the sector being monitored.
A weighting system is also incorporated into the survey database
that weights each response according to the size of sector in which
a company operates, and by its workforce size.
The seasonally adjusted global manufacturing PMI suppliers'
delivery times index is shown in chart 1.
Note that the suppliers' delivery times question is only asked
in the manufacturing and construction sector PMI surveys, and is
excluded from the services PMI surveys due to the low number of
service providers that rely on bought-in inputs of raw materials in
their principal business functions.
What does it tell us?
The suppliers' delivery times index became widely watched in the
1990s by high-profile users such as US Fed Chair Alan Greenspan,
who cited the index (produced at the time by the NAPM - now known
as the ISM) as his preferred leading indicator of inflation.
"Want to know how Federal Reserve Chairman tells if
inflation is going to get worse? Forget all those government
numbers and the latest murmuring from bond traders. Just look to
see if it's taking longer for manufacturers to get supplies
delivered.
"Mr Greenspan, speaking in congressional testimony, said
that suppliers' deliveries are "far more relevant than the Fed's
own capacity utilization figures at gauging price pressures in the
economy"
Wall Street Journal, 6 April 1996
The relationship between supplier delivery times and inflation
is illustrated in chart 2. Note that in this chart the suppliers'
delivery times index has been inverted (done simply by deducting
the index value from 100) to more easily see how supply delays are
associated with rising prices, and vice versa.
To investigate the relationship further, chart 3 demonstrates
how periods of faster global manufacturing production growth
typically lead to stretched supplier delivery times and vice versa.
Note that in this chart the suppliers' delivery times index has
again been inverted.
The delivery times index therefore illustrates when supply
issues are becoming more widespread as suppliers struggle to meet
demand for inputs from factories. At such times, suppliers tend to
have greater pricing power, causing manufacturers' input prices to
rise.
Conversely, at times of falling demand and falling production,
manufacturers cut back on their input purchases, often leaving
suppliers with excess unsold stock. At such times, suppliers are
more likely to offer discounts, driving manufacturers' input costs
lower.
In chart 4, we overlay the global suppliers' delivery times
index with the manufacturing PMI input prices index to illustrate
this link between supply chain tightness and inflationary
pressures.
Hence, a simple rule is that when output grows at a rate which
is sufficiently strong to cause a widespread lengthening of
supplier delivery times, production costs will tend to rise as
suppliers hike their prices, and vice versa.
The delivery times index can therefore be considered as a gauge
of the extent to which supply and demand are in equilibrium, and
the impact any imbalance may have on future prices.
There are some periods which prove to be exceptions, but these
exceptions can also provide very useful indications of the business
environment and inflation.
Most recently, for example, at the height of the initial
COVID-19 pandemic, China closed its factories and shipping, leading
to an unprecedented (at the time) lengthening of global supply
chains. However, prices did not rise as this supply shock was
accompanied by a simultaneous collapse in demand. During other
supply shocks, such as the Japanese earthquake- tsunami-related
supply shortages of 2011, global prices did spike higher as global
demand was expanding at the time.
Back in 2008, a sharp spike in manufacturing prices led to
heightened inflation worries at many of the world's major central
banks, but the PMI data clearly demonstrated that this price spike
was accompanied by neither strengthening manufacturing production
growth nor widespread supply shortages. As such, the data hinted
strongly that the rise in prices was principally driven by
speculative rather than fundamental factors, leaving prices prone
to a fall (which is precisely what happened as the global financial
crisis subsequently took hold).
How can it be used?
Monitoring the health of manufacturing
Perhaps the most common application of the suppliers' delivery
times index is in its inclusion in the headline manufacturing
"PMI", which is a composite indicator based on five survey
variables designed to provide a single-figure overview of the
health of the manufacturing economy. Chart 6 plots the global PMI
and its five components, with the accompanying table showing the
corresponding weights for each component.
Note, however, that there may be times - such as the pandemic
supply shock of 2020 - when the suppliers' delivery times index can
distort the signal from the PMI (
read more in our note from May 2020), hence we stress the need
to also watch the sub-indices.
Global inflation trends
As chart 1 illustrated, a further principal use is in gauging
the extent of any inflationary pressures that are being caused by
demand exceeding supply. The international comparability of the PMI
also means global or other regional comparisons can be easily
obtained, as shown by chart 7, which tracks the global PMI delivery
times index against global CPI inflation.
International comparisons
Because the PMI surveys use the same methodologies around the
world, the delivery times index can be easily used to make direct
comparisons of supply chain pressures both by country and by
sector.
Chart 8 ranks some of the countries covered by IHS Markit's PMIs
by their suppliers' delivery times index readings in June 2021.
The chart reveals that the most widespread reporting of delays
was seen in the Netherlands, followed by Austria and Germany. The
fewest delays were seen in Thailand and India.
In fact, the rankings underscore how the record incidence of
supply chain delays seen globally during the second quarter of 2021
were largely confined to Europe and the United States, with Asia
being far less affected by supply delays. This divergence is shown
in chart 9, which uses some aggregated country PMI data.
Global sector comparisons
Similarly, sector variations in delivery performance trends can
be readily analysed to ascertain where supply constraints have been
the most/least widespread. Chart 10 shows the suppliers' delivery
times index for the major manufacturing sectors globally in June
2021. The greatest supply chain delays were recorded in the tech
equipment sector followed by other machinery & equipment
manufacturers.
Time series data for each sector can easily be analysed,
including benchmarking sector performance against global 'all
sector' averages (e.g. see chart 11), with regional splits also
available for Europe and Asia.
Monetary policy signals
Given that the delivery times index can act as a useful
barometer of inflationary pressures, it can also provide helpful
insights into monetary policy trends. Central banks are eager to
assess underlying price trends by seeking to estimate the 'output
gap' or other similar concepts around capacity utilisation. The
suppliers' delivery times index therefore provides policymakers
with a single-figure proxy of industrial capacity utilisation.
Combining the suppliers' delivery times index with the PMI's
input price gauge goes one step further, producing a monthly
estimate of these supply-side constraints and the pass-through to
firms' costs. Labelled the 'price pressures' index in chart 12,
this gauge from the eurozone PMI is tracked against historical
policy changes by the ECB's Governing Council, and helps to explain
many of the ECB's policy decisions.
Related indicators
Output
The volume of units produced this month compared with the
situation one month ago (based on respondent's definition).
New Orders
The level of new orders received (in units, not money) this
month compared with the situation one month ago. Domestic and
export orders are included in this definition.
New Export Orders
The level of new orders received which will require shipment
across the national border (in units, not money) this month
compared with the situation one month ago.
Backlogs of Work
The level of unfinished sales orders, i.e. sales orders not yet
started or not yet completed (in units, not money) this month
compared with the situation one month ago.
Quantity of Purchases
The volume or number of items purchased this month compared with
the situation one month ago.
Stocks of Purchases
The level of inventory of materials purchased (in units, not
money) this month compared with the situation one month ago.
Stocks of Finished Goods
The level of finished product which has come off the production
line and is awaiting shipment/sales (in units, not money) this
month compared with the situation one month ago.
Employment
The level of full-time employment this month compared with the
situation one month ago. For the purpose of calculation it is
agreed that two part time employees should be treated as one full
time employee. Seasonal hiring of employees is excluded in this
definition.
Input Prices
Average prices of all goods purchased (volume weighted) this
month compared with the situation one month ago.
Output Prices
Average selling prices of all goods produced (volume weighted)
this month compared with the situation one month ago.
Future Output
Whether output levels will be higher, the same or lower than
current levels in 12 months' time.
Chris Williamson, Chief Business Economist, IHS
Markit
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.
