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Key gauge of economic health due for a checkup

(SINGAPORE) It is widely followed as a leading indicator of the domestic manufacturing economy, but the Singapore purchasing managers' index (PMI) appears of late to have lost its link with the sector, and looks in need of a revamp.
Anna Teo

Sat, Apr 19, 2008
The Business Times

(SINGAPORE) It is widely followed as a leading indicator of the domestic manufacturing economy, but the Singapore purchasing managers' index (PMI) appears of late to have lost its link with the sector, and looks in need of a revamp.

Asked to comment, the man who developed the index - PMI specialist Philip Poh, who himself hasn't been tracking the index closely for a while - said the Singapore Institute of Purchasing & Materials Management (SIPMM), which produces the monthly indicator, will look into it.

Dr Poh developed the Singapore PMI based on the established US PMI in 1998 when he was SIPMM's chief executive. He has not been monitoring the index closely since leaving the institute for the corporate sector about three years ago, he told BT. He is now the SIPMM council chairman.

In the United States, the PMI is widely seen as the best barometer of the manufacturing sector, partly because it is the most timely - each month's index is released by the Institute for Supply Management (ISM) on the first working day of the following month.

The ISM polls purchasing executives nationwide from a wide range of manufacturing industries about changes, if any, in various indicators - including new orders, imports, production, inventories, employment and prices - in the current month compared with the preceding month. The responses are used to produce the composite PMI and various sub-indices.

Similarly, the SIPMM polls more than 100 purchasing executives here through an online questionnaire to calculate the PMI. The European PMIs use the same methodology too, says Dr Poh, who was also tapped in 2002 to develop a PMI for China. But, he concedes, the index needs constant review and updating to ensure it remains representative of the manufacturing sector and tracks performance closely.

This is apparent enough in Singapore's relatively short PMI history. While the US PMI has been around since the 1930s, Singapore's made its debut only in 1999.

In earlier years, the PMI did seem to track the index of industrial production (IPI) - the monthly official measure of manufacturing performance - well enough, even with the latter's highly volatile growth.

Notably, the PMI signalled and tracked the manufacturing and economic slump - and subsequent rebound - during the 2001 downturn. Since then, the PMI has largely hovered above the 50-point threshold below which spells contraction. But with the emergence of the biomedical sector in recent years, Singapore's monthly IPI growth has fluctuated more sharply than before, due largely to the volatile, batch-process nature of pharmaceutical production. Yet even a smoothed-out three-month moving average of IPI growth is not tracked too closely by the headline PMI.

The divergence became most apparent in recent months: the PMI was well above 50 in the final months of 2007, yet manufacturing output contracted during the period. In 2008, the PMI fell to near-50 in January and February, and then dipped to 49.4 in March, but manufacturing activity recovered strongly in the first two months of the year, clocking just over 11 per cent growth on average.

P K Basu, chief economist (Asia ex-Japan) at Daiwa Institute of Research, says he now 'ignores' the PMI after failing to find 'any meaningful relationship' between the index and real manufacturing activity. 'I consider the monthly release of the PMI simply 'noise' that clutters the data environment without edifying anyone.'

Other economists tell BT they track the PMI simply for lack of better - or any - forward-looking indicators. It is indeed the only non-official monthly economic indicator.

Action Economics' David Cohen says he monitors the PMI, along with monthly releases from the Singapore government, as it is one of the timeliest figures released any month. 'Government collection of the export and production data involves a little more of a lag,' he points out.

Asked why he thinks the PMI seems to have gone out of sync with the IPI, Mr Cohen says: 'I guess the PMI has been fluctuating within a relatively narrow, moderately expansionary range for a little over three years, consistent with the expanding economy. The month-to-month fluctuations within that range have not told us too much about the direction in manufacturing sector activity over the short-term.

'The PMI is likely more helpful in identifying bigger swings in economic activity, as back in 2000-2001, when a sharper plunge in the PMI anticipated the downturn in production, and then tracked the rebound. Currently, perhaps if the PMI slips a bit further, remaining below 50 for a little longer, it would become a more serious source of concern.'

OCBC Bank economist Selena Ling also cites the more timely reading of manufacturers' business sentiments in the PMI, compared to the quarterly business expectations survey.

'Moreover, the industrial production and non-oil domestic exports (which come out slightly earlier) are subject to monthly volatility and occasional divergence,' she points out.

The SIPMM business survey committee in charge of producing the PMI may likely need to review its polling sample to reflect the structural changes of Singapore's manufacturing sectors since the index was first developed 10 years ago.

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