Macro Monday 34 ~ S&P PMI Composite FlashMacro Monday 34
S&P PMI Composite Flash
This S&P PMI “Flash” Composite is a very useful and relatively new data set made available since Nov 2013 that is particularly useful at providing an advance indication of the ISM Purchasing Managers Index (ISM PMI Index) which is released a week later.
We are aware from prior Macro Mondays that the ISM PMI index is based on data collected through surveys of over 800 companies in the U.S. and covers variables such as sales, new orders, employment, inventories and prices, all of which give us an indication of trends in the economy.
S&P Flash Composite Main Benefits
1. The term "Flash" in the name refers to the fact that it is a preliminary or early quick estimate of the ISM Purchasing Managers' Index (PMI) which is released later in the month. For example this month the S&P Flash Composite is released this week on Thursday 22nd Feb whilst the final ISM PMI reading is released Friday 1st March (both readings are for the month of Feb).
2. The S&P PMI Composite Flash is a “composite” insofar as it combines both the manufacturing and services sectors PMI’s into a single index. This provides a more comprehensive overview of economic activity compared to looking at either sector in isolation (however you can also view the flash PMI for Services and Manufacturing separately, these are released on the same day).
So the S&P PMI Composite Flash consists of two main components:
1. Manufacturing PMI: Measures economic activity in manufacturing.
2. Services PMI: Measures economic activity in the services sector.
Both components are based on surveys of purchasing managers and provide insights into factors like new orders, production, and employment. The Composite PMI combines these components to offer an overall picture of economic health, with readings above 50 indicating expansion and below 50 indicating contraction.
How do we get an advance “FLASH” PMI reading and how reliable is it?
The main difference between the data used in the S&P PMI Composite Flash and the final PMI figures lies in the sample size(smaller) and timing (earlier release with most recent data exclusion).
According to Investopedia and a report from S&P Global Flash (Jan 2023), the Flash Composite PMI release is based on about 85% of total PMI survey responses each month. Clearly, a significant portion of survey responses are included in the Flash PMI which would lead you to believe that its reliable early indicator but how reliable has it been historically?
In the aforementioned S&P Global Report it also provided the historical average difference between the flash and final PMI index values (final minus flash) since comparisons were first available, which are;
Composite Difference = 0.1
Manufacturing Difference = 0.0
Services Difference = 0.2
We can see that the Manufacturing Flash PMI release readings are the most reliable and that the Services Flash PMI is less reliable. Whilst both are not far off the mark, it’s a notable difference for services considering that services represents over 80% of Gross Domestic Product (GDP), thus small differences in services hold more weight. Regardless, we can be relatively satisfied that the S&P PMI Composite Flash Index is a very good and reliable early indicator of the Final ISM PMI. I will certainly be looking at this metric going forward so that I can have a great early indication of the ISM PMI.
When you review the chart of the Flash PMI with the Final PMI, you'll see that the difference appears greater than the marginal difference discussed above. This highlights, how on a chart, the difference a week or a weeks worth of data can make to how a chart appears (with the absent or included 15% of data). You will also notice that the Flash PMI is more volatile with higher and lower swings. It reminds me a little of the CPI headline vs CPI core chart in this respect, as both ultimately move in the same direction but one oscillates less than the other.
I hope the next Flash PMI released this Thursday 22nd Feb will help arm you with what is very reliable early indication of the ISM PMI (released a week later on the 1st March).
Thanks for coming along
PUKA
