The manufacturing PMI is down. It is currently at the lowest level since November 2009. And the press has reacted with more stories about a possible double dip recession.
Can we really read that much from one set of PMI figures?
Whilst the PMI is an interesting and often very useful leading indicator, there are two things to note: the first is that the indicator is still showing growth, and it showed record high levels of growth just a couple of months ago. The PMI balance indicates change so we can’t expect it to keep growing at record levels forever. In addition, Markit (who compile the PMI) do state that “the relationship [between their figures and actual growth] in manufacturing especially is never likely to be perfect, reflecting delays in the adjustment of production to demand”.
The second point is that this is one data point we’re talking about; which refers to one month; and we are coming out of a major recession.
The last time manufacturing came out of recession the PMI was volatile too. In fact, a similar number of months after the last manufacturing recession began the manufacturing PMI had returned to negative territory. So we’re in a better place than we were last time!
Figure 1: PMI manufacturing (50 indicates no change)
The fact is that there is still uncertainty in the air. Manufacturers are concerned about the coming impacts of Public Spending cuts, which are as yet unspecified. But the UK economy is growing. German exports are booming, and many UK manufacturers are in the supply chains for German exporters. Many of the risks in Europe have not (as yet) materialised, and demand from the Eurozone appears to be quite strong. The US may be looking weak, but it’s still growing. So let’s not talk down the economy just yet. Yes, there are risks, but that’s the nature of coming out of recession.