Economy is Expanding

The Purchasing Managers’ Index (PMI) is a narrowcasting tool designed to estimate economic trends and complement standard economic indicators (such as Gross Domestic Product) that require three to six months to finalize. It is a response to the need for economic policy makers for timely, high-quality, internationally compatible economic data for planning and decision making.

The PMI –

1. Overcomes most of the problems associated with GDP data.
2. Is produced very rapidly, released on a monthly basis, covering important private sector economic activities; is never revised; and acts as a reliable and accurate indicator of official data that are subsequently published.
3. Is produced using the same methodologies around the world.
4. Tracks actual events, rather than business confidence or expectations.
5. Has a better track record of measuring final GDP estimates than the first estimates produced by the Office for National Statistics – the latter tending to be revised numerous times following initial publication.
6. Methodologies are easily compared internationally.

The value of the PMI is anchored on two major factors. First, it follows the principles of simplicity regularity, relevance, repeatability, reliability, cost-efficiency and scalability. These are the same principles used to estimate the PMI in 26 countries. The PMI of the Institute for Supply Management in the United States has been a leading source of economic indicator since 1936.

Second, it stands on the belief that purchasing or supply chain managers are reliable data sources of economic activities in the private sector. The PMI’s sustainability and ability to comply with the seven basic principles largely depends on the participation of purchasing or supply majors and their role as a gatekeeper of economic activities within the firm. According to experts in supply management:

“Purchasing is at the center of everything. The PM knows what is happening to production or manufacturing, finance, and the profitability of the company. In a way, the PM is a source of a lot of information about the company’s operations.”

PMI data from January to March 2009 measured the deep fall in the country’s economic activity at the time when they actually happened and when government was pronouncing an uptrend. Data released this month confirms that indeed, the economy nosedived in the first quarter with a GDP growth of only 0.4%, way below what the policy makers forecasted.

PMI data in April and May indicated a reversal in trend at a time when they happened and when government policy makers were suggesting a possible recession. Government forecasters and advisers were making a forecast based on data in the first quarter. PMI was reporting actual events as they happened.

(for comment, write to abfontanilla@yahoo.com or nick.fontanilla@gmail.com)