Manufacturing PMI May Foretell Economic Shift

August 6, 2019
Author: Stephanie Ludwigsen

If manufacturing is not the heartbeat of the U.S. economy, then first downs mean nothing in football. Why first downs? They give teams the opportunity to progress down the field much in the same way that manufacturing jobs provide economic growth.

PMI Month Over Month Trend

A vibrant manufacturing base leads to more development, productivity, exports and middle-class jobs. Manufacturing influences the economy more than any other employment sector. So, when the U.S. economy saw 16,000 jobs added for the month of July, the heartbeat of the middle-class remained steady at a time when economists believed that the manufacturing industry would come up short of the first down.

One of several indicators for assessing the state of the U.S. manufacturing industry is the Purchasing Managers’ Index (PMI) which is published by the Institute for Supply Management monthly. A PMI above 50 represents expansion when compared with the previous month. A PMI reading under 50 represents a contraction.

The PMI has decreased steadily since August 2018 and even though there was an increase in manufacturing jobs in July, it was the also fourth straight month that the PMI went down. Out of the 18 manufacturing sectors, the sectors that experienced growth for July were balanced with the sectors that reported contraction.

The conundrum is that while there was growth for manufacturing jobs in the month of July, with large gains for the past few years, wages are not keeping in line with the rest of U.S. hourly workers. Since January 2017, the average hourly wage for all workers has risen by 7.1 percent, compared to 4.7 percent for manufacturing workers — and lower wages can be indicitive of a slowing economy.

The PMI is one variable used to forecast the state of the economy. With the PMI at 51.2 in July 2019 down from a high of 60.8 in August 2018, the PMI tends to show us that a recession is on the horizon once the level falls below 50. With that valuable information, employers may need to develop a different strategy. As opposed to continuing a hiring frenzy to fill vacant positions, employers may consider upskilling or topskilling their current employee rosters. Although the ball is moving down the field, the lowering PMI could soon force a few costly — turnovers.