Lecture 3 Flashcards
The PMI is a weighted average of which 5 indexes?
(1) New orders, (2) Production, (3) Employment, (4) Supplier deliveries, (5) Inventories
What is the weights of the 5 indexes in the headline PMI?
(30%) New orders, (25%) Production, (20%) Employment, (15%) Supplier deliveries, (10%) Inventories. This is the MARKIT PMI. The ISM PMI sets all the weights to 20%.
Can PMI be used to predict recessions?
Yes. In 1990 PMI dropped from 60>50. In 2001 it is also clearly seen. In 2008 was a sharp decline.
How is PMI calculated?
Percentage of Positive Responses + 1/2(Percentage of Neutral Responses). ((#positive/#total)100)+0,5((#neutral/#total)100)
Why is it relevant to look at the PMI?
It is highly correlated witht he economy’s GDP.
How do we interpret results from the PMI?
The expansion-contraction cutoff is 50. Any number below signals contraction, and any number above signals expansion.
What happens if the PMI comes out stronger than expected?
It is a signal of higher future growth and inflation. Market interest rates will typically increase. These days it could indirecty result in the tapering program to be discontinued, and the stock market doesn’t like that.
What value would a recession have in the PMI?
A value of around 42-43.
What is P/E?
Prices relative to past earnings. If it’s 16,2 it means that if you want to have access to one dollar of earnings you have to pay 16,2 dollars.
Why does the “New orders” index have the highest weight in the PMI?
Orders are a representation of inteded purchases, and thus have the highest predictive value.
Why is the PMI not always a great macroeconomic indicator?
Manufacturing only accounts for 20% of GDP because the economy is now more service oriented.
What is another important feature of the PMI indexes?
New orders minus inventories. When this value is zero, the economic growth rate tend to contract. At 10 or higher, growth rate is historically in excess of 3,5% - a strong genereally considered strong.
What is IFO?
A leading indicator for German economy, which is analyzing the business climate. Based on 7.000 business representatives in 4 different service sectors.
