Yesterday, ISM released its PMI numbers. And, again, we all have much to chuckle about.
You see, now that financial analysts are looking to the ISM index for economic guidance (an ill-advised move) and the index is being criticized by myself and a growing number of financial analysts, ISM is trying to backdoor its way into making its numbers seem relevant no matter how much of a stretch it is.
Here’s what I mean…
The PMI is supposed to measure economic activity in the manufacturing sector, completely independent of the services sector (which, essentially, makes it independent of the majority of the US economy). But now, they are trying to correlate manufacturing activity with overall economic activity in a rather non-sensical way.
The PMI for February was 48.3%. According to ISM’s Web site: ” A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.”
So that is bad news, right?
ISM’s Web site continues: “A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates the overall economy is growing and the manufacturing sector is contracting at this time.”
So let me make this clear to the readers.
The PMI only surveys activity in the manufacturing sector. Not the service sector. And, therefore, not the economy as a whole.
The GDP is measured in dollars and the PMI survey does not gather monetary data.
And a decline in the manufacturing sector equals growth in the overall economy?
So the stock market should have gone up yesterday, right?
As I’ve said before: BS!
On ISM’s Web site, the chair of ISM’s Manufacturing Business Survey Committee said: “The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (49.5 percent) corresponds to a 2.6 percent increase in real gross domestic product (GDP). In addition, if the PMI for February (48.3 percent) is annualized, it corresponds to a 2.3 percent increase in real GDP annually.”
This is such a lame attempt at trying to correlate the index with the GDP.
Let’s face it – ISM’s index never correlated to the GDP. ISM is now under more scrutiny than ever to prove that its index is valid.
So, what do they do?
They try to fudge the numbers so it seems like it works. Kinda like those unethical purchasing departments that have a supplier scorecard prior to sending the RFP but, once responses are in, they change the criteria and the weighting so that they can get the result that they want and create the perception that everything is above board.
So if ISM’s index says the overall economy is growing at 2.3% (certainly not a recession and better news than every other economic indicator), then why are reports covering the index values so bleak (like this example)?
Shame on ISM.
My last post on this topic inspired some passionate comments both here and on Spend Matters. I welcome more comments but challenge all commenters to share your real names.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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