Fisher Investments UK Reviews Purchasing Managers’ Indexes

Fisher Investments UK Reviews Purchasing Managers’ Indexes

To track economic conditions, Fisher Investments UK reviews a number of metrics, including Purchasing Managers’ Indexes (PMIs). We find they are timely gauges of business activity, and we think investors can benefit from understanding how they work and following their progression.

To start, PMIs are monthly surveys sent to representative firms in different industries.[i] The surveys gauge various aspects of businesses’ operations, including output, new orders, delivery times, backlogs, inventories, input costs, and employment.[ii] For each of these, the surveys ask: is an activity in that category higher or lower than the prior month?[iii] PMI providers, which range from research providers (e.g., S&P Global (NYSE:SPGI) and the US’s Institute for Supply Management) as well as government bodies (e.g., China’s National Bureau of Statistics) compile the responses into a headline figure that indicates whether the majority of firms see their business activity overall expanding or contracting.[iv]

Typically, the surveys group firms based on their economic sector (e.g., manufacturing or services). PMI providers can also aggregate these sectors into a composite reading representing the vast swath of economic activity within a region.[v] With outlets all over the world conducting PMI surveys, Fisher Investments UK thinks these readings, taken as a whole, can provide a rough snapshot of monthly business conditions – and investors can look more granularly into regions, sectors, and industries of interest if they wish.

But PMIs also have their limits, in our view. By convention, headline readings above 50 are expansionary – a majority of firms report growth.[vi] However, according to Fisher Investments UK’s reviews, investors benefit by having a more nuanced understanding of PMI readings. Firms may report whether certain aspects of their business are expanding or contracting, but they don’t specify by how much. Yet growth can still occur even when a majority sees contraction if the minority’s actual output is large enough. In our view, PMIs reveal only the breadth of firms’ growth or contraction – how widespread it is. We don’t think PMIs say anything about a sector or an economy’s magnitude of growth. Whilst this can help provide a timely – and often the first – look at economic conditions for a given month, which tends to attract headlines, we think it is important to remember PMIs are only a snapshot in time. They may reflect what just happened, but by the time records publish – typically a week or two after the survey period – their findings could already be out of date.

The primary component we would consider leading is the new orders subindex because today’s orders reflect tomorrow’s production. The ongoing expansion in new orders might suggest strength ahead, or sustained contraction may signal broader weakness. Order backlogs, too, can hint at future output if producers are trying to catch up on meeting demand. But Fisher Investments UK’s reviews find PMIs’ other components can also illuminate trends. For example, supplier delivery times can provide insight into the state of supply chains. Or, input prices – in context with additional PMI data – could give a sense of how commodity price swings affect business. Inventories and order backlogs may also illuminate whether supply and demand are out of balance.

Since PMI data aren’t always clear-cut, what is a useful way for investors to approach and interpret them? We find headlines often amplify month-to-month wiggles, extrapolating great significance from minor changes. But in Fisher Investments UK’s experience, small changes up or down usually don’t have meaningful implications for the broader economy.

Take a hypothetical headline PMI that moves up from 55 to 56 – in other words, 56% of firms said their business grew instead of 55% the previous month. Whilst financial headlines may trumpet the nominal improvement, functionally, we doubt there would be much substantive difference. The same goes for a tick down from 56 to 55. Economic observers might make much ado about slightly fewer firms reporting growth, but we think reading anything more into such a change would be a stretch.

What mostly matters to us is whether PMIs are above or below 50 – and even that is open to some interpretation, based on Fisher Investments UK reviews. As we discussed, a survey reading below 50 doesn’t necessarily imply output actually contracted. Rather than focussing on any one-month change, what are the trend and the outlook it points to? Are readings broadly expansionary or contractionary – and how does that measure up against prevailing sentiment?

PMIs provide an early look to help piece together the evolving economic picture. Though output figures (e.g., gross domestic product, a government-produced measure of economic activity) lag, in Fisher Investments UK’s view, investors still need them to confirm stories PMIs tell. We think the combination gives a clear view of the economy’s likely direction, which investors can use to assess how market expectations align with reality.

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Disclaimer:

This document constitutes the general views of Fisher Investments UK and should not be regarded as personalized investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.