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What the Latest Purchasing Data Won鈥檛 Tell You | WSJ - YouTube
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- [Reporter] Global manufacturing
is poised for a rebound
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after a rough start to 2020.
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Here's a way to see that on paper.
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It's a Global Manufacturing
Purchasing Managers Index
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or PMI for short.
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The chart tracks expected
expansion or contraction
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in manufacturing activity
around the world.
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You can see that since
February, it's dipped sharply.
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But now, it's contracting less quickly.
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Economists rely on PMIs
to get an early read
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on where the economy could be headed.
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But some warn that these
numbers can't capture
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the full picture of this recession,
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and its unique burden
on smaller businesses.
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The first thing to know about PMIs
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is where the data comes from.
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The numbers on this
chart come from a survey
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of several thousand purchasing
managers around the world.
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- Purchasing manager is the
person in an organization
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that's responsible for
getting in all the things
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that the company needs
to make what it sells.
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They kind of have a view in
how much hiring is going on
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and all the services
that they might buy in
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from other companies.
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- [Reporter] These purchasing
managers answer questions
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about things like changes
in production, new orders,
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and change in prices
over the previous month.
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The managers report whether
these numbers were higher,
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the same, or lower.
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Higher receives a 1,
the same receives a .5,
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and lower receives a 0.
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The answers are then added up,
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weighed and averaged into a score.
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And the scores are plotted
into a chart like this one
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where the 50 line marks the middle
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between growth and contraction.
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One benefit of PMIs during
periods of rapid economic change
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like the one we're in now,
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is that they're able to
come up with numbers fast,
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faster than many government measures.
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- When you're trying to
measure something as complex
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as an economy, you've got a trade-off.
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The trade-off is between speed
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and accuracy or comprehensiveness.
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If you want to know accurately
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how quickly the economy is
growing through official figures,
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you have to wait a few months.
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With the PMIs you're getting
it more or less as it happens.
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- [Reporter] That
timeliness has helped PMIs
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give economists a first
look at economic downturns,
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at least, they did when the
economy was behaving normally.
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Consider what happened in 2008
during the financial crisis
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that sparked the great recession.
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That year, PMIs like
the flash Eurozone Index
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crossed the 50 line in
November, an early warning
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of a coming economic contraction.
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But official GDP data didn't
pick up on what was happening
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until about three months later.
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And when it did, it matched
the trend captured by the PMI.
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This episode solidified
the reputation of PMIs
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as timely, incredible tools, so much so
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that central banks around the
world now use the indicator
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to inform monetary policies
like changes in interest rates.
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But the economic contraction
that began in 2020
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may reveal a blind spot in PMI surveys.
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They can't fully account
for the smallest businesses
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like gig workers or freelancers.
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That's because larger
firms are more likely
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to respond to the surveys.
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- The one thing that I
think it's fair to say
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they miss out on is the
very, very small businesses,
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the mom and pop stores, the restaurants,
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the kinds of businesses that
are probably most effected
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by the kind of lockdown that we've seen.
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One of the issues I think
that surveys like this have
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is that they are time consuming.
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So I think the information
requirement may be a bit tough
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for very small businesses
to be able to handle.
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- [Reporter] Doing this
reporting takes additional labor
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that some small businesses
just can't supply.
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This spring, companies with
fewer than 500 employees
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lost about 18.4% of the
pre-crisis workforce
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where bigger firms lost
16.6% according to ADP.
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- So you have to remember the
limitations that the PMI has.
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What it is useful for figuring out
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is broadly, how strong or
weak the economy is growing.
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But it's not gonna tell
you which bits are growing
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and which bits are contracting.
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- [Reporter] Another
limitation of a global PMI
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is that it doesn't account
for regional differences.
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For example, much of the recent upturn
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can be attributed to
new activity in China.
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The country is reopening for
business as others in the West
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are still working to contain the virus.
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- The Global Manufacturing Index
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is very heavily influenced by China
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which is the largest
manufacturer on the planet.
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Now they key thing
about China is obviously
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that it locked down earlier,
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because the pandemic hit earlier.
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So what it is,
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is a sort of mix of China recovering
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and everyone else going
through the contraction
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that China went through in
January, February and March.
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In a way it's sort of not telling you
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about the worst of this.
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So in this period, particularly
in the lockdown period,
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data doesn't mean what it
usually does, it's not as solid.
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- [Reporter] Still, as
the recovery continues,
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investors and economists will
have their eye on the 50 line.
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