J: The Institute for Supply Management (ISM) in Tempe, AZ gave us two phenomenally strong pieces of good news this week. On Monday, October 2, they told us that the PMI (L: formerly the Purchasing Managers' Index but now it only gets referred to as PMI) for September 2017 hit 60.8 percent, the highest level since May 2004. That was an unexpected jump from 58.8 percent in August.
A PMI above 50 percent indicates that the manufacturing sector is expanding. An index above 43.3 percent indicates the overall economy is growing. The PMI has been above 43.3 percent for 100 consecutive months.
The PMI level of 57.1 for the first nine months of 2017 is consistent with real GDP growth of 4.4 percent. If the September level were maintained for several more months, that would be consistent with real GDP growth of 5.5 percent. No one expects to see such awesome GDP numbers anytime soon, but these data certainly suggest we should see some pickup in growth soon.
L: This "over-predicting" of GDP has been going on for several years. How do you explain it?
J: The PMI has been produced since 1931 except for four years during World War II. It has a great track record for predicting trends in industrial production and real GDP. It is always released on the first business day of every month and is the fist indicator we get of what happened to the US economy in the previous month. The relatively recent over predictions are probably due to the declining share of manufacturing (now 11.6 percent) to total real GDP. It is still a good indicator of the trend.
The chart shows the PMI since 1948, courtesy of Advisor Perspectives. (You should ignore the negative comments about the PMI in this linked article. It was the only place we could readily find the chart. I do not agree at all with the comments quoted from Briefing.com.)
On Wednesday October 4, the ISM stunned us again with a robust report on its NMI (Non-Manufacturing Index). That NMI was 59.8 percent in September, up sharply from 55.3 percent in August and the highest level for this index since August 2005. If this level were maintained for several more months, it would be consistent with 4.2 percent real GDP growth.
Both of these widely watched indices were much higher than anyone expected to be reported for September. If historic trends continue, we should see much stronger GDP and industrial production data in the next few months. That would be great news! Keep watching.....