about 2 years ago

    Tracking Economic Activity with PMI cover image

    Tracking Economic Activity with PMI


    A healthy supply chain brings employment, price stability, and an overall functioning economy. As a trader or investor, identifying, evaluating, and formulating a plan according to the pulse of economic activity will significantly improve your decision-making and overall performance. 

    Explaining the Purchasing Managers Index (PMI)

    What is PMI
    • PMI is a monthly survey from the Institute of supply chain management (ISM) sent to the senior executives of over 400 companies across 19 industries, weighted by their contribution to GDP
    •  It measures both upstream and downstream activities for manufacturing goods and services.
    • The survey measures 5 major areas: 
      • new orders 
      • inventory levels
      • production
      • supplier deliveries
      • employment

    Understanding PMI 

    Purchasing Managers Index (PMI) determines whether business activities are expanding, contracting, or staying the same.

    • Above 50, economic activity is improving.
    • Below 50, economic activity is deteriorating.
    • The further away from 50, the greater the level of change.

    Why PMI matters

    • The PMI provides insight to investors, market analysts, and company decision-makers.
    • PMI provides one of the most thorough, easy-to-understand signals for economic growth expectations to which asset markets and policy react.​

    The Macro Data

    Over 70 years of fluctuating conditions


    Elevated inflation (+3%) hurts economic activity

    • The Feds 2-3% inflation mandate allows healthy inflation levels to boost economic cycles. However, when inflation rises above 3%, it eats away at economic growth, destroys demand, and creates uncertainty in financial markets.

    Crude Oil 

    Elevated oil prices hurt economic activity. 

    • Oil is the largest commodity in the economy, with the most demand ranging from energy to plastics to everyday household products. 
    • When crude oil prices rise to significantly high levels, it results in less spending, less earnings, and geopolitical instability.


    Copper prices are tightly correlated to the health of economic activity

    • Copper is the most widely used industrial metal in the economy as it is used for construction, electronics, and automobiles.

    • If the economy tanks, the demand for copper tanks.

    Fed Funds Rate

    Rate hikes slow down growth
    • Rate hikes are used to tighten financial conditions to prevent high levels of inflation.

    • As financial conditions tighten, economic growth slows.
    • If conditions tighten too much or too fast, it can destroy growth, throwing the economy into recession and the stock market into correction territory. 

    Rate cuts to the rescue

    • Rate cuts help restore economic activity by lowering the cost to borrow and the cost of existing debt giving.

    • Rate cuts mean more spending and investment for corporations, governments, banks, and the average consumer.

    Fed Balance Sheet

    Expanding the balance sheet 

    • The Fed aims to stabilize economic growth by injecting liquidity (expanding the balance sheet) to stimulate markets, preventing further collapse.
    • Injecting liquidity means they purchase U.S treasuries and mortgage-backed securities to lower the interest rate, ultimately easing financial conditions.

    The Dollar Index

    On average, dollar strength is correlated to decelerating economic activity (PMI).

    • When growth decelerates during market uncertainty, fear, and doubt, capital flows out of assets into dollars. 
    • ​As the business cycle turns down, financial conditions tighten, growth decelerates, and the dollar becomes a flight to safety.​

    • During or foreseeing economic shock will incentive investors to build dollar positions.

    Bond Yields

    Manufacturing growth and bond yields peak together

    • As bond investors for-see slowing growth or economic uncertainty, they migrate to bonds for fixed-income payments, ultimately pushing bond yields lower.

    Bond yields decline as growth declines unless inflation levels are rapidly rising.
    • Yields decline as growth declines meaning the demand for bonds increases as growth slows.
    • Recessionary environments attract fixed income assets which accelerate demand for bonds.
    • Bond yields can decouple from growth correlations when inflation expectations are heading to dangerous levels.


    When the PMI decelerates during all-time high stock valuations, stocks correct. 

    The further growth deteriorates under 50, the sharper stocks correct
    • Declining growth is one of the strongest recessionary signals causing investors to migrate a portion of their capital from equities to dollars and bonds.

    • Although some stocks can perform during the PMI decline, most stocks get crushed when the decline accelerates below 49-48.

    Key Takeaways 
    • ​PMI is a crucial measure of business activity impacting growth expectations.

    • Significant changes in PMI impact economic growth expectations, asset prices, and policy decisions.