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Manufacturing PMI™ data came in above consensus in April, but
the headline numbers mask a production downturn that is surpassing
that seen in the global financial crisis
Supplier delivery delays, linked to the COVID-19 supply shock,
have artificially boosted the PMI
Analysts need to look beyond the headline PMI to get a true
indication of manufacturing health
Analysts breathed a sigh of relief after US PMI data showed the
manufacturing downturn to have not been as severe as expected in
April, as COVID-19 related shutdowns hit the factory sector.
However, the decline signalled by the surveys was steeper than the
headline indices suggested, reflecting an unusual influence on the
PMI from the coronavirus which has artificially boosted the
numbers.
Better than expected?
Having recorded 49.1 in March, the ISM headline manufacturing
PMI was expected to have fallen to 36.9 in April according to the
consensus forecast from Reuters polling. The actual print came in
almost five points higher at 41.5, suggesting the manufacturing
downturn had not been as severe as the majority had been expecting.
The earlier flash PMI from IHS Markit had likewise come in higher
than widely anticipated.
At face value, both indicators are suggesting that the current
downturn in manufacturing is not as severe as the global financial
crisis (GFC).
However, this is not the case. The inclusion of supplier
delivery times as a component of the headline PMI for both surveys
has led to these indicators understating the actual collapse of
manufacturing production during the month.
Delivery delays are normally a sign of a growing
economy
The headline PMI figures are composite indicators derived from
five survey variables relating to output, new orders, employment,
inventories and suppliers' delivery times. The latter measures the
average time taken for suppliers to provide inputs to manufacturers
to use in the production process.
When orders for manufactured goods improve, demand for inputs
rises as producers seek to make more goods. This tends to put
pressure on suppliers who may not have enough stock to supply this
increased demand for inputs, which can vary from nuts and bolts,
basic food ingredients and other commodities right through to
complex components such as engines and gearboxes to be fitted into
vehicles. These delivery delays are therefore usually symptomatic
of an economy that is growing strongly.
For this reason, in most cases the suppliers' delivery times
index moves in a similar cycle to other PMI components such as
output, new orders and employment. Improvements in all of these
variables tend to be indicative of an economy growing. This was the
case, for example, during much of 2018, when surging demand led to
a marked lengthening of suppliers' delivery times, which boosted
the PMI accordingly, in line with the other PMI constituents.
Conversely, when demand falls, manufacturers cut back on their
purchasing of inputs. Suppliers are often left with unsold stock
and can consequently deliver new inputs straight off the shelf to
manufacturers. Periods of slumping demand and reduced production
therefore generally see faster (shorter) delivery times. Such a
scenario was evident during the global financial crisis of 2008-9,
when quicker delivery times acted as a drag on the PMI.
This time it's different
This time it's different, however, as delivery delays and longer
delivery times are not occurring because demand has strengthened.
Instead, since February 2020, when a large proportion of China's
factories shut down for an extended lunar new year holiday to
prevent the spread of COVID-19, supply chain delays have become
widespread as suppliers have simply not been making and shipping
goods.
In other words, recent months have seen suppliers' delivery
times lengthen due to a supply shock, not because of surging
demand.
This supply shock has since been exacerbated by an increasing
number of other countries, including the US, introducing lockdowns
to fight the pandemic. The lengthening of suppliers' delivery times
in the IHS Markit US manufacturing PMI in April was consequently
the longest in the survey's history, exceeding that seen even at
the height of the global financial crisis. A similar marked
lengthening was seen in the ISM delivery times gauge, where delays
were the most widespread since 1979.
Artificial boost
The resulting impact of supply delays on the headline PMI can be
seen by charting the PMIs from the two surveys and their five
components. Both ISM and IHS Markit surveys show that the
lengthening of delivery times is counter to what we would normally
expect to see at a time of slumping order books and falling
production. This therefore represents an 'artificial' boost to the
headline PMIs from the supplier delivery times index.
As such, the headline PMI figures are understating the decline
in manufacturing resulting from the coronavirus outbreak. This is
clearly evident by the extent to which both output and new orders
are falling compared to the headline PMIs in both surveys.
If you want to know what's happening to production look
at the output index
To get a more accurate handle on the extent to which
manufacturing is really being affected by the coronavirus, it makes
sense to look at the output index.
In fact, we would recommend that analysts should always favour
the output (and new orders) index as the best indicator of
manufacturing production trends, as the signal from the headline
PMI can easily be distorted and blurred by changes in hiring
(typically a lagging indicator) or inventories as well as supply
shocks causing delivery delays
A rate of decline worse than the GFC
If we look purely at the output indices from the two surveys, we
can see that rates of decline have in fact now exceeded those
recorded during the height of the GFC in both cases.
Both output indices are highly correlated with the official data
on manufacturing production. Looking at the last 11 years for which
comparable data are available and using a
three-month-on-three-month rate of change in the official data
(compiled by the Fed), the ISM output index display a correlation
of 79%, though the IHS Markit's correlation is substantially higher
at 89%.
The higher correlation of the IHS Markit PMI against official
production data can potentially be explained by historical
differences in methodologies, notably in survey panel design,
sample sizes and inclusion of smaller companies in the IHS Markit
survey, which is
investigated more fully in our prior paper available here.
For more information contact economics@ihsmarkit.com.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Posted 04 May 2020 by 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.
