Flash Manufacturing PMI: Meaning, Pros and Cons, Example

What is Flash Manufacturing PMI?

Flash Manufacturing PMI is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month.

Understanding Flash Manufacturing PMI

The Flash Manufacturing PMI is an early indicator of where the final PMI figure may settle. The flash reading of PMI is an estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, based on about 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.

Because flash PMIs are among the first economic indicators released each month, and provide evidence of changing economic conditions ahead of comparable government statistics, they can have a significant effect on markets, particularly the foreign exchange market. Any reading of the index above 50 indicates improving conditions, while readings below 50 indicate a deteriorating economic climate.

A flash reading is an early or advanced estimate of total responses to a survey. In this case, the report is of purchasing managers in the manufacturing sector. The PMI expresses economic conditions in the industry surveyed and the monthly "flash" report can be viewed as an advanced indicator of said conditions.

PMIs use a monthly questionnaire survey of selected companies which provide an advance indication of the performance of the private sector. It achieves this result by tracking changes in variables such as output, new orders, and prices across the manufacturing, construction, retail and service sectors.

The release of flash PMI information is a leading indicator since it comes before the collection of data from all surveys. However, it will still indicate the general trend of the industry. IHS Markit Economics reports the Manufacturing PMI in the United States.

Pros and Cons of the PMI

Strengths:

• The PMI is a timely indicator, released on the first day of the month after the month of the survey, and the Flash PMI is even more timely.
• It is an accurate leading indicator of the state of the U.S. economy.
• The PMI condenses the health of the U.S. manufacturing sector into a single number, while the Report on Business contains a wealth of information on main business activities.

Weaknesses:

• The PMI only covers the manufacturing sector, whose importance to the U.S. economy has diminished over the years. Conversely, the monthly ISM Non-Manufacturing Report on Business surveys and reports on the U.S. services sector, which represents over 80% of Gross Domestic Product (GDP).
• The Report on Business survey, data used to calculate the PMI, is subjective and may, therefore, be prone to error.
• The flash PMI does not include 100% of survey results and so may prove to be inaccurate for any given month upon release.

Real-World Example

The flash manufacturing PMI is used around the world as an early gauge for economic activity. The following excerpt from the Nikkei Flash Japan Manufacturing PMI® is an example of how that information may appear and how it may inform investing decisions. According to Joe Hayes, Economist at IHS Markit, "Preliminary PMI data for January bodes ill for Japan’s manufacturing sector, indicating the end of a near two-and-a-half-year growth run as the index dropped to 50.0. The underlying picture will raise concern given renewed reductions were seen in new orders and output."