|IIP versus PMI|
|Monday, 05 March 2012 00:00|
Does a PMI of 56.6 in February suggest a continued growth in manufacturing? While the IIP for January is due on March 12, that for February will be known only in April. Or is the HSBC Purchasing Managers’ Index, based on a survey of 500 companies, going the way of the government’s Index of Industrial Production (IIP)? Certainly the past suggests little correlation between the two, making your believing in either index more an article of faith than anything else. Between January and February 2011, for instance, the PMI rose from 56.8 to 57.9—a PMI over 50 signifies expansion—but the IIP for that period fell from 7.5% to 6.7%; between February and March 2011, PMI fell from 57.9 to 57.2 (that is, industry was still growing but at a slower pace), yet IIP rose from 6.7% to 9.4%; between March and April, PMI rose while IIP collapsed … In case you think the relationship between the two indices is an inverse one, both IIP and PMI collapsed between June and July.
One obvious reason for the difference between the two is that IIP is calculated on a year-on-year basis while PMI is worked out on a month-on-month basis, but there is a simpler explanation. IIP is very volatile and large differences in marginal items makes it behave like a yo-yo. PMI, however, appears to track GDP data very well, as well as the manufacturing sub-component of GDP. Average manufacturing PMI in Q4FY11 was 57.3, fell to 56.9 in Q1FY12, 52.2 in Q2 and rose marginally to 52.4 in Q3FY12—in this period, GDP fell from 7.8% to 7.7%, 6.9% and finally to 6.1%. In the last three quarters, along with the PMI’s fall, manufacturing GDP also fell from 7.2% to 2.7% and to 0.4% in Q3. PMI data also correlates well with exports.
All of which would suggest Q4FY12 may break trend and be better than Q3. Manufacturing PMI averaged 57.1 in January and February compared with 52.4 in Q3. That’s good news since it may ensure GDP for the year crosses the 7% mark.