“The PMI survey suggests that the economy is showing signs of yet another ‘spring swoon’ as it moves into the second quarter, linked to a softening of demand in the home market,” commented Chris Williamson, chief economist at Markit, in the firm’s April U.S. manufacturing PMI report.
Markit’s PMI index fell from 54.6 to 52.1, indicating expansion but at a slower rate than before. The new orders index declined from 55.4 to 51.5, also expanding but at a much slower rate than before. In turn, the backlogs of work index fell from 50.2 to 49.9, contracting for the month.
Investors can use PMI data to inform themselves about the economic backdrop against which they have to make decisions. Strong economic growth, indicated by increasingly positive PMI index readings, suggests higher corporate profits and, by extension, better equity performance. Underwhelming PMI data suggests that the economy is slowing down, a scenario favored by the bond market because there is less inflationary pressure.
“Manufacturers had reported the best quarter for two years in the first three months of the year, but a steep downturn in growth of orders in April suggests that this impressive performance could be shortlived. Firms have responded quickly to weaker growth of orders by limiting growth of both output and employment,” commented Williamson, chief economist at Markit.
The output index fell from 56.6 to 53.7 in April, while the employment index fell from 54.6 to 53.2. Output prices fell from 53.0 to 51.1, while input prices fell from 55.4 to 52.2.
“The combination of slowing growth and a lack of inflation will add to the growing number of reasons why Fed talk will move away from when to curb its stimulus, and instead focus on what more it might do to help keep the recovery alive,” commented Williamson.
The new orders index fell from 55.4 to 51.5, suggesting weak domestic demand. However, exports were unchanged at 51.8, indicating that foreign demand remained steady for the month.