Navigating Economic Signals: Understanding PMI as a Recession Indicator

Survey-based indicators can serve as compasses for the US economy. Among these, the Purchasing Managers' Index (PMI) for manufacturing and services have been valuable beacons. Before we dive into their predictive capabilities, let's set the stage by understanding what these indicators are.

What are Manufacturing and Services PMI?

The Manufacturing PMI is an economic indicator derived from monthly surveys of private-sector companies. It's a measure of the prevailing direction of economic trends in manufacturing. The index is a composite of five key areas: new orders, inventory levels, production, supplier deliveries, and the employment environment.

The Services PMI, on the other hand, started in 1997 and captures similar domains but within the vast services sector, which accounts for a significant portion of GDP in most developed nations.

Both indexes are pivotal as they help businesses and investors gauge the health of the economy. They are based on factors such as new orders, inventory levels, production, supplier deliveries, and employment. A reading above 50 signals expansion; below 50 indicates contraction.

PMI as a Recession Indicator

Coincident Rather Than Leading

Historical data since 1979 for Manufacturing PMI and since 1997 for Services PMI suggest that these indicators function more as a coincident than a leading indicator of recessions. This means they tend to move in tandem with the economy rather than predict its direction.

Thresholds During Recessions

It's been observed that during each recession, the Manufacturing PMI has dipped below the 41.8 mark. For the Services PMI, the critical threshold seems to be 44.8.

A Recession Red Flag?

Another crucial observation is that neither the Manufacturing nor Services PMI has fallen below 44.8 without a subsequent recession. This pattern offers a significant signpost for analysts and policymakers.

Current State

As of now, the Manufacturing PMI stands at 46.7, not far from the 44.8 threshold but still in the contraction territory. Meanwhile, the Services PMI paints a more optimistic picture at 52.7, even showing signs of improvement.

Deciphering Today's Market

Today's market is a mixture of complex and often conflicting signals. While the PMI data does not currently point towards an imminent recession, especially when considering the buoyancy in the services sector, it's a piece in a larger economic puzzle. As investors and decision-makers, it's crucial to consider a range of indicators to navigate the markets effectively.

In essence, PMI figures add valuable color to the economic narrative. They indicate that we are not necessarily on the cusp of a recession, particularly if we focus on the robust services sector. Like any economic data, PMIs are a single brush stroke on a vast canvas. In the current market, characterized by its many moving parts and uncertainties, PMIs serve as a reminder that while we should remain vigilant, there's also room for cautious optimism.

The journey through economic signals is often through a winding path rather than a straight line, and PMIs are an essential part of that journey, offering both reflection and foresight into the market's health.

Putting these Insights into Action

Modelist offers financial advisors a straightforward way to build custom model portfolios. They also provide a strategy based on coincident economic indicators, like the PMI data, to guide tactical asset class decisions. This can help advisors adjust their models to the current economic environment.

Contact Modelist to learn how we can help you design customized model portfolios, enabling you to provide sophisticated investment portfolios for your clients.