China Research

The Purchasing Manager Index (PMI) serves as a well-known and quite reliable short-term indicator in an increasing number of countries. When I introduced the PMI for Sweden at Swedbank together with SILF in the year 1994, this indicator had its history only in the United States. Neutral analysts consider the quality of the Swedish PMI as fairly good, too, particularly since we then did not rush into this new indicator for “marketing reasons”. Our tests and seasonal adjustments took quite some time. In a number of other countries, the PMI preparations took considerably less time until publication. Whether the increased speed of preparation has been affecting the quality of the PMI in different countries more negatively, I am not really sure about. Nowadays, the PMI can be found all over the world, China included.

I had some comments on the two Chinese PMIs in a previous blog (from June 7, 2013). Today, I would like to make some further comments and repeat some of my previous ones (which to a high can be applied generally as well).

First, analysts and media should handle smaller monthly changes of the PMI more carefully – particularly when the PMI moves upward but still relatively closely to the 50-index level, i.e. around 51-53. An improvement from 51.4 to 52.0 does not mean a lot of a change.

Second, the PMI is a so-called diffusion index. This means that the monthly changes of the PMI – particularly when the changes are more limited – do not really express the strength of the individual changes in the index. In other words: analysts should not only focus on the direction of the PMI but also on the level. This is not always the case. The experience from Sweden is that more positive times and improvements of the business situation tend to show up more clearly when the PMI starts exceeding levels around 55. This thumb rule may, however, vary from country to country.

Third, less monthly random can be achieved when also 3-months moving averages are added to the usual graph or numbers. Thus, a limited trend interpretation is made possible.

Fourth, when it comes to China we really do not have any idea about the composition and representativeness of the selected “PMI companies “(which users of the PMIs in our part of the world do not either; but statistics in the Western part of the globe tend to have – with certain exceptions – higher statistical standards compared to statistical quality in China).

Fifth, the PMI could be the best Chinese short-term indicator all the same. When longer time series will be available, this thinkable record will be very interesting to analyze more thoroughly. And the other point to summarize is that small moves of the PMI – up or down – should not be interpreted too exactly. However, the PMI remains an interesting, fresh and quickly calculated economic indicator in many countries. Hopefully in China, too!

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

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