The Purchasing Manager's Index (PMI) has often been considered one of the premier macroeconomic indices on the state of the economy, yet a more exhausting analysis suggests that there is not a strong link between the PMI and equity returns. This goes back to the key issue that the real economy is often not linked with equity returns. Recent work from Citibank reported in the FT discusses the problem.
The general rule is that the economy is in contraction if the PMI is below 50 and in expansion if it is above 50 for this diffusion index. Further refinements can be made by looking at the 3-month change in the PMI, so there are four states: recovery when the PMI is below 50 and rising, expansion if the PMI is above 50 and rising, contraction if below 50 and falling, and slowdown when the PMI is above 50 but falling.
The Citibank works suggests that sometimes the PMI indicator works, but it is also the case the equity markets lead PMI. This real indicator based on recent survey information with limited lags does not always provide any early sign on the return and risk in markets.
As usual, working with macro data is messy and there are no clear-cut rules that can be applied to the PMI data. It may tell you something about where you or where you may be going but it is not always a useful map.
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