The PMI Index is an important indicator of economic health. It is compiled and released monthly by the Institute for Supply Management. The ISM sends surveys to senior executives at more than 400 companies, asking managers about monthly changes in business conditions in five major areas: new orders, inventory levels, production, supplier deliveries, and employment. Contrary to Markit Economics PMI’s, the ISM weighs each of these survey areas equally.
The PMI is calculated as: PMI = (P1 x 1) + (P2 x 0.5) + (P3 x 0)
P1 = percentage of answers reporting an improvement
P2 = percentage of answers reporting no change
P3 = percentage of answers reporting a deterioration
As one can see, the PMI is a number from 0 to 100. If all managers report improvement, the index is 100. If all respondents note a deterioration, the index equals 0. If all managers see no change, the index is 50. Hence, the index above 50 means an expansion, while below 50 implies a contraction.
ISM Manufacturing, ISM Non-Manufacturing and Chicago PMIs
PMI can provide a tailored view of the sector to focus on – there is ISM Manufacturing PMI, ISM Non-manufacturing PMI, and Chicago PMI. The first two nationwide ones are pretty self-explanatory in that they either cover manufacturing industries or not, while the Chicago PMI assesses the respective economic health in the Chicago region only. The reason for mentioning this localized assay is that it precedes the ISM data announcement by a few days and therefore, is a useful bellwether indicator.
These PMIs also range from 0 to 100. Again, 50 is neutral while a reading above it indicates expansion, and a reading below it marks contraction.
PMI Index and Gold
What is the link between the PMI Index and the gold prices? In theory, the high PMI (above 50) indicates that the US economy is expanding, which should be bad for the gold prices. And low PMI (below 50) signals the economic contraction, which should support the yellow metal. But let’s put theory aside and look at data.
Chart 1: PMI Index (red line, left axis) and gold prices (yellow line, right axis, London P.M. Fix, in $) from April 1968 to March 2019.
The chart above shows that there is actually no tight link between the gold prices and the PMI Index. During big slumps, like Great Recession, the PMI plunged, while gold shined. But over the whole period, the correlation coefficient is 0.024, which practically means lack of any meaningful correlation.
The reason might be that, although the PMI is a timely indicator and may sometimes lead the GDP, it is based on subjective assessments of managers, which limits the use of this index. This is why the precious metals investors should look beyond the headline PMI Index and analyze also other indicators before making their investment decisions.
ISM Manufacturing PMI and Gold
Manufacturing remains an important part of the economy, decreasing share of total employment notwithstanding. Its total output is what counts, and it keeps pushing higher. Perhaps a contracting manufacturing PMI will serve as an early warning sign that there’s trouble ahead for the economy? Perhaps gold’s appeal will increase as a result? Unfortunately, it’s not turning out this way, and the aggregate PMI Composite Index attests to that.
ISM Non-Manufacturing PMI and Gold
But services take a bigger share of the economy. There’s even the acronym FIRE economy (finance, insurance and real estate). We may be onto something… Turns out, not. Gold price simply isn’t correlated to anything of this kind either.
Chicago PMI and Gold
Leaving no stone unturned, we’ll take a look at Chicago PMI now. Neither this or any other regional PMI gauge has given us any promising lead in predicting gold price unfortunately.