Is July 2021 the best month for PMI manufacturing since the pandemic?
PMI values above 50 indicate an expansion in economic activity compared to previous month. The month on month increase in July PMI manufacturing value is also the highest since June 2020
The Purchasing Mangers’ Index (PMI) for manufacturing reached 55.3 in the month of July. The latest PMI manufacturing value has jumped above the critical threshold of 50 after falling to 48.1 in June 2021.
PMI values above 50 indicate an expansion in economic activity compared to previous month. The month on month increase in July PMI manufacturing value is also the highest since June 2020.
What does this mean as far as the state of economic activity is concerned? This question is best answered by looking at the journey of India’s manufacturing PMI since the pandemic.
What is PMI manufacturing?
PMI manufacturing surveys are collected by the survey agency IHS Markit across many countries. IHS Markit’s website says that the “PMI indices are calculated as diffusion indices” which “vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease”. PMI manufacturing is a weighted average of indices of new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).
The fact that July 2021 PMI manufacturing value is greater than 50 means that level of economic activity, as captured by the five indices, was higher than what it was in June.
What happened to PMI manufacturing after the pandemic?
Beginning March 25, 2020, India imposed one of the most stringent lockdowns in the world to prevent the spread of Covid-19 infections. Almost all economic activity, except what was deemed essential, was disrupted. As a result, PMI manufacturing fell from its March 2020 value of 51.8 to 27.4 in April 2020.
“At 27.4 in April, the seasonally adjusted IHS Markit India Manufacturing PMI fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago”, a press release from dated May 4, 2020 from IHS Markit said.
PMI manufacturing crossed the critical threshold of 50 only in August 2020. It kept gaining momentum until October 2020, when it reached an all-time high of 58.9. PMI manufacturing started losing momentum thereafter, although it only fell below 50 in the month of June 2021.
PMI trends during the second wave of Covid-19 infections have prompted many experts to argue that the second wave and associated restrictions did not affect economic activity as badly as during the first wave.
But PMI figures are not very useful in tracking holistic economic recovery
Since PMI measures month-on-month changes, that too from a selected sample of firms, it is not a very good measure of holistic economic recovery, which is the medium-term challenge after the pandemic’s disruption.
This is best seen from a comparison of PMI manufacturing and year-on-year growth in Index of Industrial Production (IIP). Even though PMI manufacturing was above the 50-mark in March 2020, IIP actually contracted on an annual basis. Monthly IIP showed a contraction in the months of August 2020, November 2020 and January-February 2021 despite the PMI manufacturing value being higher than 50.
The silver lining in July data — finally, a recovery in jobs
To be sure, the July recovery PMI manufacturing data is on expected lines. The Nomura India Business Resumption Index (NIBRI) had risen from 86.3 in the week ending June 27 to 95.3 in the week ending July 25. What is heartening about the latest PMI manufacturing data is the fact that it has shown an increase in employment for the first time since the pandemic began.
“The PMI also brought the positive news of job creation in the manufacturing sector. Although marginal, the rise in employment was the first since the onset of COVID-19. With firms’ cost burdens continuing to rise, however, and signs of spare capacity still evident, it’s too early to say that such trend will be sustained in coming months”, Pollyanna De Lima, Economics Associate Director at IHS Markit, said in a release issued by IHS Markit.
The Purchasing Mangers’ Index (PMI) for manufacturing reached 55.3 in the month of July. The latest PMI manufacturing value has jumped above the critical threshold of 50 after falling to 48.1 in June 2021.
PMI values above 50 indicate an expansion in economic activity compared to previous month. The month on month increase in July PMI manufacturing value is also the highest since June 2020.
What does this mean as far as the state of economic activity is concerned? This question is best answered by looking at the journey of India’s manufacturing PMI since the pandemic.
What is PMI manufacturing?
PMI manufacturing surveys are collected by the survey agency IHS Markit across many countries. IHS Markit’s website says that the “PMI indices are calculated as diffusion indices” which “vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease”. PMI manufacturing is a weighted average of indices of new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).
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The fact that July 2021 PMI manufacturing value is greater than 50 means that level of economic activity, as captured by the five indices, was higher than what it was in June.
What happened to PMI manufacturing after the pandemic?
Beginning March 25, 2020, India imposed one of the most stringent lockdowns in the world to prevent the spread of Covid-19 infections. Almost all economic activity, except what was deemed essential, was disrupted. As a result, PMI manufacturing fell from its March 2020 value of 51.8 to 27.4 in April 2020.
“At 27.4 in April, the seasonally adjusted IHS Markit India Manufacturing PMI fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago”, a press release from dated May 4, 2020 from IHS Markit said.
PMI manufacturing crossed the critical threshold of 50 only in August 2020. It kept gaining momentum until October 2020, when it reached an all-time high of 58.9. PMI manufacturing started losing momentum thereafter, although it only fell below 50 in the month of June 2021.
PMI trends during the second wave of Covid-19 infections have prompted many experts to argue that the second wave and associated restrictions did not affect economic activity as badly as during the first wave.
But PMI figures are not very useful in tracking holistic economic recovery
Since PMI measures month-on-month changes, that too from a selected sample of firms, it is not a very good measure of holistic economic recovery, which is the medium-term challenge after the pandemic’s disruption.
This is best seen from a comparison of PMI manufacturing and year-on-year growth in Index of Industrial Production (IIP). Even though PMI manufacturing was above the 50-mark in March 2020, IIP actually contracted on an annual basis. Monthly IIP showed a contraction in the months of August 2020, November 2020 and January-February 2021 despite the PMI manufacturing value being higher than 50.
The silver lining in July data — finally, a recovery in jobs
To be sure, the July recovery PMI manufacturing data is on expected lines. The Nomura India Business Resumption Index (NIBRI) had risen from 86.3 in the week ending June 27 to 95.3 in the week ending July 25. What is heartening about the latest PMI manufacturing data is the fact that it has shown an increase in employment for the first time since the pandemic began.
“The PMI also brought the positive news of job creation in the manufacturing sector. Although marginal, the rise in employment was the first since the onset of COVID-19. With firms’ cost burdens continuing to rise, however, and signs of spare capacity still evident, it’s too early to say that such trend will be sustained in coming months”, Pollyanna De Lima, Economics Associate Director at IHS Markit, said in a release issued by IHS Markit.