Were the PMIs a Good Guide to the European Recession?

The Lantern Research Paper, June 2010

24 Pages Posted: 7 Jun 2010 Last revised: 28 Jun 2010

See all articles by Colin Ellis

Colin Ellis

Hult International Business School (London)

Date Written: June 7, 2010

Abstract

In the absence of more timely or accurate information, survey indicators of economic activity are closely watched by financial markets and policymakers alike. These include the Purchasing Managers' Indices (PMIs), which are widely regarded as important indicators of economic activity. PMIs are available for a variety of economies, with the oldest series dating from the early 1990s. But, while the performance of the PMIs during periods of expansion has been good, their accuracy during the recession has been widely questioned. In light of this, this paper examines the recent performance of the PMIs in the UK and the euro area, and the three largest euro area economies. First, it sets out the methodology behind the PMIs, noting that the underlying survey questions do not explicitly capture growth rates, and hence can be misleading when the distribution of activity within firms across the economy changes. Second, it examines the relationship between the contemporaneous activity PMIs and the supposedly forward-looking orders indices, to see if they area leading indicator. And finally, the paper looks at the relationships between official production and GDP data and the PMIs, and finds evidence of structural breaks in these relationships during the recession. At the moment, it is unclear whether the old pre-recession relationships will re-assert themselves as European economies enter the recovery phase of the cycle, but, based on the latest data, the signs are not particularly encouraging.

Keywords: Surveys, Official Data, Breakpoint

JEL Classification: C32, E37

Suggested Citation

Ellis, Colin, Were the PMIs a Good Guide to the European Recession? (June 7, 2010). The Lantern Research Paper, June 2010, Available at SSRN: https://ssrn.com/abstract=1621624 or http://dx.doi.org/10.2139/ssrn.1621624

Colin Ellis (Contact Author)

Hult International Business School (London) ( email )

35 Commercial Road
London, E1 1LD
United Kingdom

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