- [Reporter] Global manufacturing is poised for a rebound
after a rough start to 2020.
Here's a way to see that on paper.
It's a Global Manufacturing Purchasing Managers Index
or PMI for short.
The chart tracks expected expansion or contraction
in manufacturing activity around the world.
You can see that since February, it's dipped sharply.
But now, it's contracting less quickly.
Economists rely on PMIs to get an early read
on where the economy could be headed.
But some warn that these numbers can't capture
the full picture of this recession,
and its unique burden on smaller businesses.
The first thing to know about PMIs
is where the data comes from.
The numbers on this chart come from a survey
of several thousand purchasing managers around the world.
- Purchasing manager is the person in an organization
that's responsible for getting in all the things
that the company needs to make what it sells.
They kind of have a view in how much hiring is going on
and all the services that they might buy in
from other companies.
- [Reporter] These purchasing managers answer questions
about things like changes in production, new orders,
and change in prices over the previous month.
The managers report whether these numbers were higher,
the same, or lower.
Higher receives a 1, the same receives a .5,
and lower receives a 0.
The answers are then added up,
weighed and averaged into a score.
And the scores are plotted into a chart like this one
where the 50 line marks the middle
between growth and contraction.
One benefit of PMIs during periods of rapid economic change
like the one we're in now,
is that they're able to come up with numbers fast,
faster than many government measures.
- When you're trying to measure something as complex
as an economy, you've got a trade-off.
The trade-off is between speed
and accuracy or comprehensiveness.
If you want to know accurately
how quickly the economy is growing through official figures,
you have to wait a few months.
With the PMIs you're getting it more or less as it happens.
- [Reporter] That timeliness has helped PMIs
give economists a first look at economic downturns,
at least, they did when the economy was behaving normally.
Consider what happened in 2008 during the financial crisis
that sparked the great recession.
That year, PMIs like the flash Eurozone Index
crossed the 50 line in November, an early warning
of a coming economic contraction.
But official GDP data didn't pick up on what was happening
until about three months later.
And when it did, it matched the trend captured by the PMI.
This episode solidified the reputation of PMIs
as timely, incredible tools, so much so
that central banks around the world now use the indicator
to inform monetary policies like changes in interest rates.
But the economic contraction that began in 2020
may reveal a blind spot in PMI surveys.
They can't fully account for the smallest businesses
like gig workers or freelancers.
That's because larger firms are more likely
to respond to the surveys.
- The one thing that I think it's fair to say
they miss out on is the very, very small businesses,
the mom and pop stores, the restaurants,
the kinds of businesses that are probably most effected
by the kind of lockdown that we've seen.
One of the issues I think that surveys like this have
is that they are time consuming.
So I think the information requirement may be a bit tough
for very small businesses to be able to handle.
- [Reporter] Doing this reporting takes additional labor
that some small businesses just can't supply.
This spring, companies with fewer than 500 employees
lost about 18.4% of the pre-crisis workforce
where bigger firms lost 16.6% according to ADP.
- So you have to remember the limitations that the PMI has.
What it is useful for figuring out
is broadly, how strong or weak the economy is growing.
But it's not gonna tell you which bits are growing
and which bits are contracting.
- [Reporter] Another limitation of a global PMI
is that it doesn't account for regional differences.
For example, much of the recent upturn
can be attributed to new activity in China.
The country is reopening for business as others in the West
are still working to contain the virus.
- The Global Manufacturing Index
is very heavily influenced by China
which is the largest manufacturer on the planet.
Now they key thing about China is obviously
that it locked down earlier,
because the pandemic hit earlier.
So what it is,
is a sort of mix of China recovering
and everyone else going through the contraction
that China went through in January, February and March.
In a way it's sort of not telling you
about the worst of this.
So in this period, particularly in the lockdown period,
data doesn't mean what it usually does, it's not as solid.
- [Reporter] Still, as the recovery continues,
investors and economists will have their eye on the 50 line.