July 10, 2014

What will GDP do next?

Purchasing managers’ indices can be reliable indicators of future growth.
Manufacturing PMIs have led GDP growth rates by about three months.
Global PMIs have been telling us to expect accelerating growth ahead.


This is the first in a series describing my tenets for long-term investing — that is, the indicators I believe can stand the test of time. I like to think about the markets in terms of the business cycle, so let’s focus on how I make decisions about where we are in the cycle.

It’s particularly important to get the direction of the economy right. When I try to anticipate what GDP will do next, I find that the best indicator of an economy’s future growth is the purchasing managers’ index (PMI).
In the United States, the PMI from the Institute for Supply Management is based on the responses of purchasing managers to a monthly survey that asks about the direction — up or down — of new orders, backlogs, deliveries, inventories, prices and so on. These components are aggregated into a composite that has been widely followed, and for good reason. With uncanny precision, the ISM PMI that focuses on the manufacturing sector leads by about one quarter the year-over-year rate of US GDP growth.


Similar PMIs are available around the world — in Canada, Japan, China and emerging markets, to name a few. Outside the US, manufacturing PMIs can also be useful indicators over long periods of time, and they work dramatically well in in the UK and the eurozone.

What are manufacturing PMIs telling us now? Looking broadly, it appears that both the US and the eurozone are still on track for more growth over the next few quarters.

The US business cycle has rolled along after a disappointing first quarter — even accelerating into the second half of the year. Just to cite some statistics, employment gains have been consistent, industrial production and capacity utilization have increased and motor vehicle manufacturing and sales have risen, while inflation has replaced disinflation as a concern.

In Europe, first-quarter GDP data were also on the disappointing side, showing a wide dispersion among nations, with Germany and Spain doing well but France and Italy lagging. As we look for the region to regain some of the momentum displayed last year as it began to exit recession in the wake of its painful financial crisis, we are closely monitoring the recent downtick in the eurozone’s manufacturing PMI.



No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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