The Bangladeshi PMI is roaring ahead and that's glorious. That a Bangladeshi PMI even exists is a disaster that will all end in tears. Fairly contradictory statements, but both have a truth to them. You, of course, are wondering what a PMI even is.
One way of describing it is that it's an economic statistic and those are bad. Sir John Cowperthwaite, when Financial Secretary to Hong Kong, forbade anyone from even collecting GDP (that is, size of the economy) statistics on the grounds that, “Some fool will only want to use them.”
He -- and I -- are, agreed, on the fairly extreme end of the possible spectrum. Macroeconomics doesn't, not really, work. Partly because the information is never very good, it's always late and the useful pretense leads to far too much interference in the economy by politicians and bureaucrats. But, you know, that's to be extreme.
As to what a PMI is, it's the “Purchasing Manager's Index,” and the reason the UK government is supporting its calculation for Bangladesh is that, as far as economic statistics go, it's actually got the possibility of being useful.
Our problem with macroeconomic statistics is that they are always old, but people will insist upon using them to plan the immediate future. This does not work. Knowing what the traffic is in Naranyanganj does not aid us in steering through Kanchpur. Even if we've just come from one to the other, the information is too late to be of much use.
Most economic statistics are like that. We know what unemployment was six weeks or two months back, when the counting was done. Inflation we know over the past year, not the next year, which is what we'd like to know. When we start to talk about investment by companies, and so on, our information is usually about 18 months old -- we get it from the published accounts of the corporations.
Inflation we know over the past year, not the next year, which is what we'd like to know
This is a problem. For politics just insist upon trying to guide the economy. Yet it does so on this old information. Not what is happening now, not what is about to happen, but what happened some time ago. Like driving by looking at the rear view mirror.
Which is where the PMI comes in. The technique is very simple. Create a list of the people who buy the stuff for factories. The purchasing managers. If they're buying more, right now, then they're expecting the factory will produce more next month. It's that “next” which is important. We've now got a prediction about the future, not a measure of the past.
Yes, it's still a prediction. It has been known that factories expand output and then find that no one wants to buy it. But still, we create our list of these guys and then we call them up each month. “So, Ahmed, you buying in more raw materials than last month?” And then we turn those responses into an average. Deliberately set up so that if the index is above 50 then, on average, more is being bought to make more. Less than 50 then less.
Again, this is not perfect. But it's a measurement of what is happening now -- purchases of materials to make next month's output -- which gives us a prediction about next month's output.
Now, as it happens I know -- professionally, not personally -- the people who invented this idea. Who then sold the company and set up again to create another, similar, index. Which comes out the day before the PMI for most economies. And they get paid for their new measure even as they've banked their money for the old one. For the people who actually use PMIs are not, in fact, the politicians and bureaucrats. It's investors.
Which neatly answers our question about whether PMIs are good or not. As long as they're not being used for some bureaucrat or politician to do some damn fool thing they're fine.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
