The Book of Alternative Data

CHAPTER 12Purchasing Managers' Index

12.1. INTRODUCTION

As we discussed in Chapter 1, the ability to accurately predict changes in key economic indicators, such as GDP, can serve a wide number of groups, not only investors. We mentioned that PMI indicators could be a good proxy for this purpose. Given their importance, in this chapter we will elaborate more around them. We will present some quantitative analysis to justify their use.

GDP forecasting (or better nowcasting) can be used by policymakers to optimize changes to key macroeconomic management levers such as interest rates or fiscal policy. Likewise, by knowing the current macroeconomic context, investors and businesses can make investment allocation decisions with greater certainty and potentially better performance. As a result, in recent years, practitioners have focused on improving their understanding of economic performance in near “real time,” rather than waiting for updates to slowly produced official figures, such as GDP, which are also numbers subject to notable future revisions. Performing such a task requires the use of other high-frequency datasets that are released in a timely fashion. This up-to-date information can be exploited to predict, or nowcast, slower-released, low-frequency macroeconomic variables such as GDP.

For example, the PMI series produced by IHS Markit in over 40 countries can be such a high-frequency and timely data source. It is derived from a questionnaire sent to a fixed panel of selected ...