US Macro: PMI February
Since this is my first post on PMI lets start with an introduction. PMI is considered one of the most important indicators in order to understand what might happen in the following months, its a leading indicator.
But it’s very important to understand how it works. A common mistake made in many environments is to say “PMI shows that economy is growing” or “Industry is growing, PMI says”. Well, that’s not quite true. PMI is a survey, where they ask companies in the Manufacturing business what are their plans for the following months. And then they answer on things like new orders, employment, prices etc.
What this means is that PMI is a reflection of what businesses say they ARE PLANNING TO DO. This is, what we should expect to happen during the following months. Which is very important, because it means that all this has not yet happened. That’s why it’s a leading indicator and that’s why we can not say “We have growth according to PMI” or other similar things.
So how should we use PMI? In my opinion, the best way to use PMI is to help build up an idea of how strong growth might be among Industrial companies. This will obviously influence the rest of the economy.
2. USA PMI
Now let’s go to the important matters, what’s been going on with PMI in the US. Because as we’ve seen the stock market has been very strong in the past months.
What we see in this graph is the PMI vs New Orders.New Orders are a part of the PMI it tells ask how many new orders are businessmen expecting in the coming months. So it’s considered a leading indicator of the PMI itself.
There are 2 things I’d like to point out on this graph:
-PMI: Turned expansive (over 50) during early 2016. And it’s been going up non-stop since October 2016.
-New Orders: Are also pushing higher and higher with no sign of peaking.
This points out to an expansion of the economy. During the next months we should expect the economy to be strong (according to his indicator) and therefore we should expect companies beating expectations. Especially in the industrial sectors.
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