(pleasant mallet percussion music)
- [Narrator] Here's a chart that anyone
who looks at the economy is going to pay attention to.
It's a purchasing managers' index, or PMI.
This one looks at global manufacturing.
50 represents the midline between expansion and contraction.
When the line rises above 50, it suggests manufacturing
is increasing or improving.
When it dips below, it suggests a decrease.
In 2018 and 2019 during the U.S.-China trade war,
investors embraced global manufacturing PMIs
as a leading barometer of economic health.
Traders and policy makers looked to them
to answer the question,
how will Trump's trade policy affect the world's economy?
And several times over those years,
the earliest and clearest cracks showed up in PMIs.
To understand what makes PMIs so popular,
first you have to understand how they work.
(pleasant mallet percussion music)
For a scan of what's going on in the economy,
PMIs survey the world's purchasing managers.
- The purchasing manager is the executive within a firm
who's responsible for buying everything, essentially.
This could be the inputs that go into the production line
or it could be the desks required for new employees.
- [Narrator] A purchasing manager sits
at an important juncture in a company's supply chain.
- The purchasing manager's the right person to speak to
because he's got access to a wonderful source of data,
whether that's how much the firm's gonna be producing
in the next few months,
whether it's taking on more employees,
whether its inventories are high
and it's gonna have to start scaling back on its purchasing.
The purchasing manager
really knows everything about the firm.
- [Narrator] For PMIs, purchasing managers answer questions
about what's going on on the ground.
Compared to a month ago, have there been changes
in production, new orders, prices, or backlogs.
For each question,
the managers can give one of three answers,
higher, the same, or lower.
The index assigns a different value
to each of those answers.
Higher gets a one, the same gets a .5,
and lower gets a zero.
The answers are then added up,
weighed, and averaged into a score,
and these scores are plotted onto a chart, like this one,
where the 50 line marks the middle
between growth and contraction.
When a manufacturing PMI slides and dips below 50,
policy makers take notice.
Through most of 2018,
official forecasts like those from the Federal Reserve
and International Monetary Fund held steady,
and until the fourth quarter, the stock market climbed,
but global manufacturing PMIs
were telling a different story.
You can see it here.
For much of 2018, manufacturing output was sliding.
Then, in June of 2019, it dipped below 50,
implying a downward pull on the economy.
- It's the most up-to-date source of information
on business conditions, so that's got an advantage
over data such as GDP,
which often tends to be produced with a lag.
Having up-to-date information is especially important
for policy makers setting interest rates.
If you can get a quick view on how the economy's changing,
you can adjust interest rates faster,
meaning less adjustment is needed.
If you wait until the economy's already in a recession,
then you're gonna have to start slashing interest rates,
but if you got an indication
that the economy's edging towards recession,
you only need to do a small tweak to interest rates.
- [Narrator] Track the PMI numbers
against news flow on the trade war,
and you can see them line up.
The blue line shows new export orders
and the red and green lines show news flow
on the U.S.-China trade war.
Red lines are when talks moved in a negative direction
and green lines are when they moved positive.
Right here, where the line turns around,
that reflects the Fed's policy shift in 2019.
Officials began easing policy after indicators
like the PMI began to show the economy was softening.
PMIs drew attention during this period
because they aren't revised
the way some government data series are.
Revisions are useful, but they can make the trend
and the data harder to see.
- There's a lot of economic official data out there
which also gets revised heavily, sends misleading signals,
so the PMI's really useful in acting as a challenger data
to some of those GDP numbers, employment numbers
to make sure the policy makers have confidence,
even in the official data that they're watching.
(pleasant mallet percussion music)