Purchasing Managers Index Provides Strong Indices for Commodities Markets


If you want to know the past, a good place to start is to look at gross domestic product. It tells you the dollar value of a country’s or region’s goods and services over a period of time, but GDP is like looking in the rearview mirror in that it shows you where you have been and hardly more. It is “blind” to what awaits you. For that, you need another indicator, the purchasing managers index (PMI).

Unlike GDP, PMI forecasts future manufacturing conditions and activity by evaluating forward-looking factors such as production levels, new orders, and supplier deliveries. PMI, then, is like the high beams guiding you at night through the twists and turns of a mountain road.

On several occasions in the past, we have shown that there is a strong correlation between the reading of the global PMI and the performance of commodities and energy three months later. When a ‘cross-over’ PMI occurs, that is, when the monthly reading exceeds the three-month moving average, this has historically signaled a possible uptrend for crude oil, copper and gold. ‘other commodities. Our research shows that between January 1998 and June 2015, copper had an 81% chance of increasing by 7%, while crude jumped by the same amount three-quarters of the time.

The reverse is also true. When the monthly reading drops below the three-month moving average, the same commodities and materials once fell three months later. The global PMI fell in December, from 51.2 in November to 50.9. The reading also exceeded the moving average.

As you can see, the PMI has been following a relatively steady downtrend since mid-2014, signaling the decline in commodities during the same period.

According to a recent report by Cornerstone Macro, one of the main contributors to the decline in the global PMI in December was weak manufacturing activity in the United States. The research group had expected improvement, but the US one-month PMI landed “with a thud” at 48.2, its lowest point since June 2009. China also contracted in December, falling to 48.2. The reading was also above the three-month average.

The Asian giant is responsible for the massive consumption of raw materials: 60% of global concrete, 54% of aluminum. So when the PMI falls in both China and the United States, the world’s two largest economies, it is not a good sign.

Cornerstone cites the strong US dollar, weaker exports, rising inventories of manufactured goods and falling oil prices as factors that led to last month’s slowdown. I agree these factors played a huge role – oil has slipped below $ 30 a barrel this week – but I would add heavier regulations to the list as well. Rules like this have blown the cogs of the industry, and it’s essential that they get cleaned up to trigger synchronized global growth.

It’s hard to overstate the importance of the US manufacturing sector to the national (and global) economy. According to the National Association of Manufacturers (NAM), manufacturing has the highest multiplier effect and drives innovation more than any other industry. For every dollar spent on manufacturing, $ 1.40 is created and pumped back into the US economy. The sector employs more than 12 million Americans, or about 9% of the workforce, and supports more than 18 million additional jobs.

If this were its own country, America’s manufacturing sector would be the ninth-largest in the world, yet the cost of federal regulations falls disproportionately on manufacturers, who pay an average of $ 19,500 per worker in compliance costs, or about $ 10,000 more than what other industries have to pay. on average.

The Mercatus Center at George Mason University, a free market think tank, studied the effects of federal regulations on the productivity of various industries between 1997 and 2010. Not surprisingly, the group found that the most regulated industries experience the least growth. While output per person for lightly regulated firms increased 63 percent during the period, output increased only 33 percent for those with higher regulatory burdens.

More rules mean less productivity and efficiency. By analogy, imagine if professional basketball was played with more officials than players on the court, and with more rules than anyone can remember. No one could score! This would have a huge multiplier effect: viewers would drop, ticket sales would drop, advertising would dry up, and much more.

Goods returns

Below is our all new Periodic Table of Commodity Returns, which has consistently been one of our most popular research papers year after year. Precious metals ended 2015 as the best performing group, with palladium, gold and silver ranking among the strongest commodities. A high resolution copy of the painting is available for download.


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