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America’s leading economic indices forecast an ongoing economic recovery

By Kurt Funderburg, Director of Equity and Economic Research

The concurrent COVID-19 pandemic, a tumultuous U.S. Presidential election, and continued social unrest across the country have defined 2020’s overall economic outlook since February by two words: volatile and uncertain.

Absent a crystal ball, weighted and diffusion indices have never been watched more carefully as they have been over the past six month by companies, entrepreneurs, and investors.

The Dow Jones, S&P 500, and NASDAQ are the most commonly cited indices by many businesspeople to forecast general macroeconomic health and anticipate future investment decisions. Other, less publicized indices, however, can provide manufacturing companies and exporters with a clearer view of where consumer confidence and markets are headed long-term—which better prepares them to make short-term decisions on material purchases, inventory, and production staffing.

What is PMI?
The Purchasing Managers’ Index, or PMI, is among the most widely followed economic metric indicators of the prevailing direction of America’s overall economic winds.  It measures manufacturing and service sector confidence specifically.

In the simplest terms, PMI measures whether market conditions are expanding, contracting, or remain unchanged based on a monthly survey of supply chain managers from more than 400 companies across 19 industries, including new orders, inventory levels, production, supplier deliveries, and employment. The answers are then weighted based on the companies’ contribution to U.S. GDP.

PMI is measured on a scale of 0 to 100. A PMI above 50 represents an expansion of market confidence month over month. A PMI under 50 represents a contraction. 50 indicates no change. The further away from 50 the faster the rate of change.

Since a low of 41.5 in April 2020, America’s PMI has steadily increased through summer to 56 in August signaling strong growth and resurging manufacturing confidence going into fall (it rose from 52.6 in June to 54.2 July).

“Both the monthly PMIs and the regional Fed manufacturing indices have shown steady improvement since the April bottom caused by the lockdowns,” explains Kurt Funderburg, Vice President and Director of Equity & Economic Research at First American Bank. “The recovery has been a little uneven regionally, but it’s fair to say that all regions have rebounded at this point. And while growth will likely slow from Q3’s pace, we expect the manufacturing economy will continue to rebound as we move through Q4 into 2021.”

Indices like PMI are critical for decision makers, especially in manufacturing industries and companies with internationally layered supply and distribution chains. For companies to stay competitive—particularly in the current era of unprecedented economic insecurity—the need to maintain inventory balance and production levels while making purchasing decisions and forecasting working capital needs doesn’t stop because of the uncertainty of a pandemic or an election year.

“This recession and its recovery have been different from almost any other in history,” says Funderburg. “Because of the unique, public health-driven nature of this slowdown manufacturing has held up much better than services. This is the opposite of the normal recession pattern where manufacturing has slowed due to supply outrunning demand while services have held up better.”

With respect to COVID-19 specifically, the PMI outlook for 2021 appears cautiously optimistic, says Funderburg, particularly as it relates to consumer confidence and purchasing going into winter. That’s a strong vote of confidence that even without a permanent solution for the pandemic yet, consumers are finding their new normal and companies are getting back to business.

“Even though it’s unlikely we’ll return to pre-pandemic economic activity levels until there’s a broadly distributed effective vaccine, progress towards ending the pandemic is improving confidence in manufacturing rapidly,” Funderburg explains. “Effective treatments that lessen the virus’s severity are already here and being used and that’s eventually going to reinforce the return to normalcy.”

As far as the U.S. Presidential election is concerned, Funderburg’s expectation is that the current uncertainty will be short-lived as far as the major indices and markets go, signaling an even stronger return to positive growth and economic expansion in 2021.

“Politics are going to play a role in the economy for a while,” he predicts. “We're heading into an unusually contentious election, and business owners, even more so than financial markets, dislike uncertainty. The prospect of delayed election results or of a materially less business friendly regime in D.C. could have an effect on the willingness of manufacturers to increase investments in both physical and human capital in the short-term. But so far the forecast for next year remains strong.”

Kurt Funderburg is Director of Equity and Economic Research of the Wealth Management Group at First American Bank.