What This Supply Chain ‘Mood Ring’ Tells Us About The Recovery
I wrote previously about how business surveys, such as the Purchasing Manager’s Index Survey (PMI), are good at showing not just the mood of supply chain managers but also what kinds of business conditions are actually occurring. Their sentiment responds to and creates real business output. Kind of like a mood ring, but one that actually works.
Look below and you’ll see that the mood got very, bad early last year and has been getting much better since then, hitting some of the highest levels we’ve seen since the Reagan recovery.
So, how do we translate sentiment into growth? We know that sentiment tends to go with growth. The chart below shows a clear positive correlation between them. But the statistics are in different units. Surveys like this are basically asking managers to rate conditions on a scale of 1 to 100, like giving the economy a grade on a test. But we measure actual output in terms of things like growth rates in percent terms. Using the line below, we can use the manager’s grading of the economy and translate it into an ‘expected’ growth rate. By expected, we don’t mean that it is actually something they are expecting. Thee survey is not asking what they expect the growth rate to be. “Expected value” is a math thing. It means that when you create an equation which represents the historic relationship between two things (typically an X and a Y), you can plug in a new X and calculate what the Y would be if the equation represents reality.
So, what do we get if we plug in the most recent ‘X’, the PMI managers grade for their industry? We can see that by looking at the point where the two lines cross one another. They do that at close to 5% on the up and down axis. That means expected growth is roughly 5%.
Now, that’s just one survey. You can look at the cloud of dots above and clearly see that there is a correlational relationship. But you can also see that the dots do not perfectly align with the line, which means that this line does not perfectly predict growth. It’s one witness, albeit a decent one, among many.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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