Forecasting the NAPM Purchasing Managers' Index

Article excerpt

Forecasting the NAPM Purchasing Manager's Index

The Purchasing Managers' Index, published monthly by the National Association of Purchasing Management (NAPM), is a highly recognized indicator of the health of the United States economy. Its information is so highly prized that many desire to get the information early. This article looks at several different indexes published by NAPM each month to help in making estimates of future values of the Purchasing Managers' Index. The results indicate that New Orders and a new index based on New Orders and Vendor Deliveries are both consistent leading indicators of the Purchasing Managers' Index by one month.

The Purchasing Managers' Index, published monthly by the National Association of Purchasing Management (NAPM), is a highly recognized indicator of the health of the U.S. economy. A recent editorial in Electronic Buyers' News (EBN) highlighted the importance of this indicator.[1] EBN commented on a Wall Street Journal article that encouraged NAPM to maintain better control of the dissemination of its report. A supposed leak led to a bond price surge on a Friday afternoon when the sharp decline in the Purchasing Managers' Index was interpreted as a sign of slower economic activity. EBN also reported that some periodicals, such as Business Week, have begun publishing estimates of the index. For example, the June 12, 1989, issue of Business Week predicted a May index of 54.5 percent, while the actual figure turned out to be 49.7 percent. Since then, NAPM has altered its procedures and now releases the survey on the first business day of the month following the survey month.[2]

Previous studies have verified the validity of the NAPM survey relative to the national economy.[3] In one recent study, Hoagland and Taylor proposed two new indexes from the data gathered by NAPM.[4] The first, called the Business Barometer, is an unweighted average of the seasonally adjusted data for the production, new orders, employment, purchases, and vendor performance change indexes. A change index records the percentage of respondents answering "higher" to a question minus the percentage answering "lower." With zero as the point of no change, a positive sign indicates an increasing level of activity, while a negative sign indicates a decreasing level of activity. The benefits of the Business Barometer are that (1) it is easier to calculate, since it requires no weighting, and (2) it is less erratic than the Purchasing Managers' Index.[5]

The second index proposed by Hoagland and Taylor is the Forecasting Index for predicting business cycle turning points. The Forecasting Index is calculated by subtracting the seasonally adjusted Inventory change index from the seasonally adjusted New Order change index. When the Forecasting Index is negative, a business decline is likely to develop; when it is positive, a business expansion is likely. Thus, the proposed Forecasting Index should be useful in forecasting the future values of either Hoagland and Taylor's Business Barometer or the Purchasing Managers' Index. The rationale of this index is that a New Orders increase, production in later periods will need to increase to meet these orders, and if inventories are decreasing, production will need to continue or increase to replace the shrinking inventories. Thus, if New Orders are up and Inventories are down, a higher index value is produced than is the case when New Orders are up and Inventories are up.

This article investigates the performance of the Forecasting Index as a forecasting tool for both national and regional data. Alternative indexes based on the research also are proposed for forecasting the performance of the Purchasing Managers' Index.

THE STUDY

The purpose of this research is to evaluate the effectiveness of potential leading indicators of the Purchasing Managers' Index, including the Hoagland and Taylor Forecasting Index (HTFI). …