- [Reporter] Global manufacturing
is poised for a rebound
after a rough start to 2020.
Here's a way to see that on paper.
It's a Global Manufacturing
Purchasing Managers Index
or PMI for short.
The chart tracks expected
expansion or contraction
in manufacturing activity
around the world.
You can see that since
February, it's dipped sharply.
But now, it's contracting less quickly.
Economists rely on PMIs
to get an early read
on where the economy could be headed.
But some warn that these
numbers can't capture
the full picture of this recession,
and its unique burden
on smaller businesses.
The first thing to know about PMIs
is where the data comes from.
The numbers on this
chart come from a survey
of several thousand purchasing
managers around the world.
- Purchasing manager is the
person in an organization
that's responsible for
getting in all the things
that the company needs
to make what it sells.
They kind of have a view in
how much hiring is going on
and all the services
that they might buy in
from other companies.
- [Reporter] These purchasing
managers answer questions
about things like changes
in production, new orders,
and change in prices
over the previous month.
The managers report whether
these numbers were higher,
the same, or lower.
Higher receives a 1,
the same receives a .5,
and lower receives a 0.
The answers are then added up,
weighed and averaged into a score.
And the scores are plotted
into a chart like this one
where the 50 line marks the middle
between growth and contraction.
One benefit of PMIs during
periods of rapid economic change
like the one we're in now,
is that they're able to
come up with numbers fast,
faster than many government measures.
- When you're trying to
measure something as complex
as an economy, you've got a trade-off.
The trade-off is between speed
and accuracy or comprehensiveness.
If you want to know accurately
how quickly the economy is
growing through official figures,
you have to wait a few months.
With the PMIs you're getting
it more or less as it happens.
- [Reporter] That
timeliness has helped PMIs
give economists a first
look at economic downturns,
at least, they did when the
economy was behaving normally.
Consider what happened in 2008
during the financial crisis
that sparked the great recession.
That year, PMIs like
the flash Eurozone Index
crossed the 50 line in
November, an early warning
of a coming economic contraction.
But official GDP data didn't
pick up on what was happening
until about three months later.
And when it did, it matched
the trend captured by the PMI.
This episode solidified
the reputation of PMIs
as timely, incredible tools, so much so
that central banks around the
world now use the indicator
to inform monetary policies
like changes in interest rates.
But the economic contraction
that began in 2020
may reveal a blind spot in PMI surveys.
They can't fully account
for the smallest businesses
like gig workers or freelancers.
That's because larger
firms are more likely
to respond to the surveys.
- The one thing that I
think it's fair to say
they miss out on is the
very, very small businesses,
the mom and pop stores, the restaurants,
the kinds of businesses that
are probably most effected
by the kind of lockdown that we've seen.
One of the issues I think
that surveys like this have
is that they are time consuming.
So I think the information
requirement may be a bit tough
for very small businesses
to be able to handle.
- [Reporter] Doing this
reporting takes additional labor
that some small businesses
just can't supply.
This spring, companies with
fewer than 500 employees
lost about 18.4% of the
pre-crisis workforce
where bigger firms lost
16.6% according to ADP.
- So you have to remember the
limitations that the PMI has.
What it is useful for figuring out
is broadly, how strong or
weak the economy is growing.
But it's not gonna tell
you which bits are growing
and which bits are contracting.
- [Reporter] Another
limitation of a global PMI
is that it doesn't account
for regional differences.
For example, much of the recent upturn
can be attributed to
new activity in China.
The country is reopening for
business as others in the West
are still working to contain the virus.
- The Global Manufacturing Index
is very heavily influenced by China
which is the largest
manufacturer on the planet.
Now they key thing
about China is obviously
that it locked down earlier,
because the pandemic hit earlier.
So what it is,
is a sort of mix of China recovering
and everyone else going
through the contraction
that China went through in
January, February and March.
In a way it's sort of not telling you
about the worst of this.
So in this period, particularly
in the lockdown period,
data doesn't mean what it
usually does, it's not as solid.
- [Reporter] Still, as
the recovery continues,
investors and economists will
have their eye on the 50 line.
