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Using the Purchasing Managers' Index to assess the economy's strength and the likely direction of monetary policy

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  • Evan F. Koenig

Abstract

When economists are concerned that the economy may be about to change direction, one of the indicators to which they give special scrutiny is the Purchasing Managers’ Index (PMI), released monthly by the Institute for Supply Management. This article discusses the construction and interpretation of the PMI and presents evidence of its usefulness as an indicator of growth in the manufacturing sector and the economy as a whole, and as a predictor of changes in Federal Reserve policy. PMI values above 47 generally signal expansion in manufacturing, while the critical value for positive GDP growth is around 40. Over the past fifteen years, PMI values above 52.5 have tended to be associated with rising short-term interest rates.> When economists are concerned that the economy may be about to change direction, one of the indicators to which they give special scrutiny is the Purchasing Managers’ Index (PMI), released monthly by the Institute for Supply Management. This article discusses the construction and interpretation of the PMI and presents evidence of its usefulness as an indicator of growth in the manufacturing sector and the economy as a whole, and as a predictor of changes in Federal Reserve policy. PMI values above 47 generally signal expansion in manufacturing, while the critical value for positive GDP growth is around 40. Over the past fifteen years, PMI values above 52.5 have tended to be associated with rising short-term interest rates.>

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (2002)
Issue (Month): ()
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Handle: RePEc:fip:fedder:y:2002:n:v.1no.6

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Keywords: Economic indicators ; Manufactures ; Interest rates;

References

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  1. Evan Koenig & Sheila Dolmas & Jeremy M. Piger, 2002. "The use and abuse of 'real-time' data in economic forecasting," Working Papers 2001-015, Federal Reserve Bank of St. Louis.
  2. R. Mark Rogers, 1992. "Forecasting industrial production: purchasing managers' versus production-worker hours data," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 25-36.
  3. Ethan S. Harris, 1991. "Tracking the economy with the purchasing managers' index," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 61-69.
  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  5. Stephen K. McNees, 1986. "Modeling the Fed: a forward- looking monetary policy reaction function," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-8.
  6. Ethan S. Harris, 1991. "Tracking the economy with the purchasing managers' index," Research Paper 9124, Federal Reserve Bank of New York.
  7. Nathan S. Balke & D'Ann Petersen, 1998. "How well does the Beige Book reflect economic activity? Evaluating qualitative information quantitatively," Working Papers 9802, Federal Reserve Bank of Dallas.
  8. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Tsuchiya, Yoichi, 2014. "Purchasing and supply managers provide early clues on the direction of the US economy: An application of a new market-timing test," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 599-618.
  2. Claudia Godbout & Jocelyn Jacob, 2010. "Le pouvoir de prévision des indices PMI," Discussion Papers 10-3, Bank of Canada.
  3. Valentina Aprigliano, 2011. "The relationship between the PMI and the Italian index of industrial production and the impact of the latest economic crisis," Temi di discussione (Economic working papers) 820, Bank of Italy, Economic Research and International Relations Area.
  4. Sjoerd van den Hauwe & Dick van Dijk & Richard Paap, 2011. "Bayesian Forecasting of Federal Funds Target Rate Decisions," Tinbergen Institute Discussion Papers 11-093/4, Tinbergen Institute.
  5. repec:ecb:ecbwps:20111428 is not listed on IDEAS
  6. Godbout, Claudia & Lombardi, Marco J., 2012. "Short-term forecasting of the Japanese economy using factor models," Working Paper Series 1428, European Central Bank.
  7. D’Agostino, Antonello & Schnatz, Bernd, 2012. "Survey-based nowcasting of US growth: a real-time forecast comparison over more than 40 years," Working Paper Series 1455, European Central Bank.
  8. Kajal Lahiri & George Monokroussos, 2011. "Nowcasting US GDP: The role of ISM Business Surveys," Discussion Papers 11-01, University at Albany, SUNY, Department of Economics.
  9. Daragh Clancy, 2013. "Output Gap Estimation Uncertainty: Extracting the TFP Cycle Using an Aggregated PMI Series," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 1-18.

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