- October 9, 2019
- Posted by: David Marshall
- Category: Business, Manufacturing, Productivity
There’s all kinds of talk that the manufacturing economy is heading for a recession, even as manufacturing output is on the rise. But you may be wondering how we even know this, especially as the rest of the economy seems to be doing so well, including having low unemployment in the U.S.
When it comes to knowing how the manufacturing output sector is doing, we get our figures from the Purchasing Managers Index (PMI). The PMI is a monthly survey of supply chain managers who work in 19 different industries, and they cover both upstream and downstream purchasing and sales activity. The PMI looks at whether the manufacturing market is expanding, contracting, or staying the same.
Economists look at the PMI as an indicator of the state of the manufacturing economy. When the PMI is below 50 percent, the manufacturing economy is in contraction or expected contraction. When it’s above 50 percent, we’re in a growth mode. And for the last three months, the PMI has been running below 50 percent for the last three months, around 46 or 47 percent.
Even with unemployment at record lows, the number of employed at record highs, and consumer confidence is still high, we’re looking at a specific manufacturing recession because businesses have stopped investing and don’t feel confident about their own outlook.
How Does the PMI Work?
The PMI is basically a survey of purchasing managers in various industries. Different purchasing managers will give their opinion as to where they see their businesses today and in six months’ time.
The PMI has been around for 20 years, and it’s not so much scientific as it is a function of what those purchasing managers are feeling on any given day. In other words, if you didn’t receive any revenue today, where would you rate on a 1 – 100 index?
For argument’s sake, companies will look at the orders they booked, the shipments they’ve made, and if the orders on their books are worth 30, 60, or 90 days of production. Normally, there’s a benchmark in there somewhere that the purchasing manager is using as their indicator.
They may say something like, “As long as I’ve got orders that will cover 60 days, business is stable. If it’s 90, we’re growing. But if we only have 15 days of orders, that means 15 days from now, we won’t have anything to ship.”
So their rating on the index will be pretty low, because they’re living hand to mouth. But that could all change in a month or two, thanks to any number of variables.
So How DO We Know Output is Going Up?
Let’s keep it simple, and say the economy is made up of manufacturing and service, also called Goods and Services. Goods is manufacturing, Services can include banking and health care, in addition to consulting, marketing agencies, and even retail outlets.
The service sector could be growing, but manufacturing can be shrinking, so on a general basis, the economy looks stable.
But in business, if you’re measuring everything, you can tell if your backlog is shrinking or growing. If your business traditionally runs well on a 30-day backlog of orders, but it suddenly starts to drop, you’ve got a problem coming your way. If the backlog starts to grow, you’ve got a better problem, which means you’d better hustle.
And the purchasing managers are able to see how much product they can produce and how quickly they can fulfill orders. We know industry output is going up because of the growing number of automated machines and systems being installed, and how much product companies can make in a given time.
PMI is generally proven to be a very accurate indicator, even if it’s not actually very scientific. Because if purchasing managers are not being stressed to increase material purchases and increase production, then by default, it will contract. It’s what people in industry are feeling at the moment, and historically it has borne out the performance of the manufacturing economy.
I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now I help companies turn around their own business and increase their manufacturing output. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.
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