Purchasing Managers Indices and Recession
This past week, data from European and North American countries were released that showed deteriorating expectations from managers in developed markets. There are several different data points that show manager intent and expectations put out by different providers. They are all useful but because they are produced independently by different companies and for specific countries, the construction and survey methodology are different and therefore not 100% comparable. One data series that we like is called the Global Purchasing Managers’ Index (PMI) series, put out by IHS Markit, a British company that “provides independent data, trade processing of derivatives, foreign exchange and loans, customized technology platforms” across multiple countries.
The PMI consists of several different surveys of managers from businesses in manufacturing or services. IHS asks questions of 400 companies (in each country) for 20 segments of their businesses and managers mark 1 for improvement, 0.5 for no change and 0 for deterioration. The survey is done every month for each country. The data is compiled together and a score above 50 indicates expected improvement over the coming months, while a score below 50 indicates contraction.
- Figure 1 presents PMI data for manufacturing companies from the three major world economies. As you can see, after a period of strength, the data have dropped the past year (recently more quickly in the US and Europe).
- Service companies, on the other hand, have posted better results but we thought it was interesting, in the context of recession expectations, that manufacturing expectations are slowing.
- Note that, other than China, the data shows that manufacturing is still expected to expand; however, that rate of growth has decreased. It will be interesting to see if the data series drop into contraction over the coming months.
“This means that” various data points have recently caused the investment community to become somewhat focused on the potential for recession. In our opinion, the drop in equities markets so far this year was mostly valuation related, i.e.. stocks dropped because of a perceived change in interest rate expectations due to central bank attempts to reign in inflation. The concern developing now is more related to a potential decrease in earnings due to a slow down in the global economy. We view this as a natural part of the investment cycle and a developing opportunity to get our portfolios positioned in some of the best companies in the world.
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