Reading the Economic Tea Leaves: Why the PMI Matters

Good Morning Ladies and Gentlemen

“Let them see you struggle. But never let them see you quit.”

Kevin Gates

Before we dive into today’s topic, I would like to briefly reflect on a matter that has been increasingly occupying my thoughts: the democratisation of knowledge. While this development is undoubtedly commendable, I am growing concerned that the use of AI is reinforcing existing ideologies. Users naturally frame their questions through the lens of their own worldviews, leading the AI to generate responses that align with their preferred narratives. We tend to seek role models who inspire us, look for validation from those below us, and increasingly turn to artificial intelligence in the hope of being guided solely by our own viewpoints, thereby further entrenching them. AI is a willing helper. What initially seems like a technological advancement raises a more profound question: are we losing the ability to think critically for ourselves? We are delegating judgments, assessments, and decisions to digital systems with increasing frequency as long as we get confirmation. As a result, the formation of our own opinions is overshadowed by external knowledge, confirming perspectives, and, perhaps most importantly, undignified values, as long as our points of view are confirmed. Think about it!

The Purchasing Managers’ Index – I

The leading economic indicator in the US has declined by a full point, yet it remains well within expansionary territory. In August, the Swiss manufacturing PMI stayed above the growth threshold for the sixth consecutive month. Meanwhile, the eurozone’s manufacturing PMI reached 52.7, its highest level since May 2022. Japan, too, has experienced its most significant increase in new business in over eight and a half years. So, is everything going smoothly? Let’s take a moment to examine what the PMI represents.

The Purchasing Managers’ Index – II

The Purchasing Managers’ Index (PMI) is a leading economic indicator that measures the health of the manufacturing and services sectors. It is compiled from monthly surveys of purchasing managers, who assess changes in new orders, production levels, employment, inventories, and supplier delivery times. Because these professionals sit at the front end of supply chains, they often detect shifts in demand before they become visible in broader economic statistics. The resulting index ranges from 0 to 100, with a reading above 50 indicating expansion and a reading below 50 signalling contraction. The PMI is valued primarily for its timeliness, as it is released well before many official economic reports. This allows businesses, economists, and policymakers to track changes in economic momentum in near real time and identify emerging trends before they are reflected in GDP growth, industrial production, or labour market data.

The Purchasing Managers’ Index – III

For financial market participants, the Purchasing Managers’ Index (PMI) is an important tool for assessing the future direction of the economy and asset prices. Investors monitor PMI releases closely because changes in business activity often influence corporate earnings, inflation trends, and monetary policy decisions. Strong PMI readings can signal improving economic growth and rising demand, which may support equity markets and cyclical sectors. Conversely, weakening PMI figures may indicate slowing activity and heightened downside risks. The indicator is also closely followed by central banks, as it provides insights into pricing pressures and overall economic conditions. Because the PMI is released monthly and frequently turns before other economic indicators, it can help identify potential turning points in the business cycle. Its predictive nature enables investors and portfolio managers to adjust asset allocation, sector exposures, and risk positioning ahead of broader market reactions.

The Purchasing Managers’ Index – Conclusion

The recent PMI data collectively suggest that global economic activity is proving more resilient than many had anticipated, despite the ongoing U.S. conflict with Iran and the resultant rise in energy prices. Manufacturing conditions have improved across several major economies, indicating that businesses are experiencing healthier demand, rebuilding confidence, and expanding production, even in the face of tariffs and trade disputes. However, it is important not to view PMI readings in isolation. While strong survey results often signify accelerating growth, they can also indicate increasing capacity constraints, tighter labour markets, and thus (and unfortunately) renewed pricing pressures. This combination is particularly relevant for central banks. If robust PMI data coincides with rising inflation, policymakers may be more inclined to maintain higher interest rates for an extended period or to postpone anticipated rate cuts. On the other hand, a slowdown in PMI momentum could signal that economic activity is cooling, which might support a more accommodative monetary policy. As a forward-looking indicator, the PMI remains a crucial tool for evaluating not only the trajectory of economic growth but also the potential course of interest rates and, by extension, financial markets. To me, PMI is always worth looking at, not so much a single reading but rather to spot trends.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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Mail: smk@incrementum.li