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Manufacturing Is Doing Much Worse Than The PMIs Indicate

May 06, 2020 11:27 AM ET4 Comments
Tim Worstall profile picture
Tim Worstall


  • There's a trick in the PMI numbers which tells us that manufacturing is doing worse than the headline numbers tell us.
  • The market more generally seems to be believing those headline numbers, this being something of an error.
  • This factor does not apply to the services numbers which we should therefore take as being more accurate or indicative.

Yes, it's a recession

Clearly and obviously we're in a recession. But what we'd like to know is how deep is it? For that will at least start us down the track to working out how many companies are going to survive and also how steep the hill we've got to climb out of it is going to be.

We'd also like to get a heads up on this. Rather than waiting until a month after the time period concerned, as we would have to do with GDP figures and the like, we'd like to have some idea of what's going on now which tells us about the future


This of course is where the purchasing managers' indices come in. For the US we have two versions, one from the Institute for Supply Management, the other from IHS Markit. They use slightly different panel constructions but we're not worried about their differences at this level. It's also not quite true to say that they're forward indicators - they are measures of what is happening now. Rather, they're measuring - what is being bought to make things out of - the things which give us a guide to what future production is going to be.

However, we have a slight problem with the manufacturing PMIs as they're not telling us quite what we think they are. They're showing that the world is quite a bit better than it truly is.

Suppliers' delivery times

This is something that is common to both measures, ISM and IHS. If supplier delivery times stretch out, then this is counted as being evidence of the economy expanding. Or of not contracting if you prefer.

The intuition is simple enough.


(Suppliers' delivery time indices from IHS Markit)

If everyone's getting busier, then there will be more call

This article was written by

Tim Worstall profile picture
Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian: https://seekingalpha.com/user/52914142/comments

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

Where do we go from here? hopefully not into another great depression.

Models show that if 80 percent of people wear masks that are 60 percent effective, we can get to an effective R0 of less than one. That’s enough to halt the spread of the disease.

We overreacted with the lockdown, which caused this recession and increased the national debt. We need to carefully reopen the economy and return to activity and productivity, do what we can to help the economy recover.
This is criminal behavior and he should be tried as such
The economy will be slow for a long time. When people don't feel safe, they won't go out and spend. Trump has undermined confidence by giving up on the virus and driving the country to reopen. It will backfire. We can't lock down forever but we can't pretend the virus doesn't exist, either. No answers, no confidence, no economic boom. But the market is forward looking and we will see better times...the question is when.
It's up to governors, not the president.
Either way, continuing the lockdown for more than a few weeks is also unsustainable in many ways.

Look at the Covid numbers by age group. We need to isolate and protect the elderly and the infirm, maintain reasonable social distancing, wear a mask, wash our hands etc. But find the strength and courage to continue activity and productivity so we'll have the resources to cope with the challenges ahead
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