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

  • Evan F. Koenig

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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File URL: http://dallasfed.org/assets/documents/research/efpr/v01_n06_a01.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (2002)
Issue (Month): ()
Pages:

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Handle: RePEc:fip:fedder:y:2002:n:v.1no.6
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  1. 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.
  2. Balke, Nathan S & Petersen, D'Ann, 2002. "How Well Does the Beige Book Reflect Economic Activity? Evaluating Qualitative Information Quantitatively," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 114-36, February.
  3. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  4. Ethan S. Harris, 1991. "Tracking the economy with the purchasing managers' index," Research Paper 9124, Federal Reserve Bank of New York.
  5. Koenig, Evan F. & Dolmas, Sheila & Piger, Jeremy M., 2000. "The use and abuse of "real-time" data in economic forecasting," Working Papers 0004, Federal Reserve Bank of Dallas.
  6. 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.
  7. 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.
  8. 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.
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