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Purchase Power

Is the Georgia Purchasing Manager's Index an economic crystal ball?

by Drew Ermenc

May 4, 2009

As answers still elude the true depth of the current Great Recession, it's even more difficult to drill down for clues to the end of Georgia's economic woes. Enter Kennesaw State University's Georgia Purchasing Manager's Index (GPMI), and Don Sabbarese, professor of economics at KSU's Coles College of Business. Since 1991, the school has released monthly numbers derived from surveys taken by purchasing managers in the manufacturing sector across the state.

Why is this important? The GPMI has proven to be a valuable indicator for the upcoming health of Georgia's economy. Case-in-point: The index started signaling the decline of our current state of affairs way back in late 2006. Dr. Sabbarese spoke with BtoB about his index, the indicators and whether he feels we've hit rock bottom.

BtoB: What is the GPMI and the variables that make up the number?
Sabbarese: It's structured the same as the National Purchasing Manager Index Survey. It has five underlying components: new orders, production, employment, supplier delivery time, and finished inventories. And those five underlying components are weighted equally by 20 percent to come up with what we call a diffusion index.

From a macro-economic perspective, why is the GPMI important?
Good question. The reason it's important is timeliness. If you look at other data that may be related to the national or the Georgia PMI - especially the National PMI, data like industrial production or factory orders - the PMI will [forecast those changes] by probably a month and a half. And not only [forecast] it by a month and a half, but it's never revised.

So is the GPMI a leading indicator?
It leads that data. There's no doubt. Now, it has components within it that are included as a leading indicator, but the timeliness of that information [isn't as good] because, like industrial production, it's released and then it's revised. So, it leads that kind of information [industrial production and factory orders, for example], which is very important.

I would say, on a state level, it is [a leading indicator], mainly because you can't even get that level [of information]. When you come down to the state level, there's no doubt that you're getting information way before it's available. And that's why a lot of times you see regional surveys or state surveys that are designed like this. It's hard to get timely data on sectors of the economy on the state level.

When did you first start seeing a progressive decline with this recession?
I won't call it progressive. I mean, we started seeing the decline well in advance. ... The decline started back in the latter part of 2006 and early part of 2007. But there were some ups and downs within that period of time, so it wasn't as clear. What was very clear was this: By the time we got past the summer of '08 into September and October, the decline was accelerating tremendously.

So you saw the slowdown before other indicators were showing them.
Yes, the reason for this is the manufacturing sector tends to be very cyclical and sensitive - like the automobile industry - to levels of interest rates and so forth.

What about the March numbers? Where are we now versus last fall?
The Georgia PMI hit all-time lows in November and December. And so they were very low, and the underlying components were very low, obviously. If you have a number of 50, the implication is that ... you have equal numbers of companies that are growing versus those that are not growing. But, as you get further above 50, you measure the manufacturing sector by the number of companies that are growing. When you get below 50, then it's indicative that a greater number of companies aren't growing.

January through March's improvement reveals that manufacturing is still contracting, but at a much slower rate than November and December levels. The good news is we already hit bottom. The bad news is we're not out of the woods yet.

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