One of Canada's most reliable economic indicators for stock-market direction is, curiously, also one of its most underrated. The Ivey Purchasing Managers Index (PMI) may be below the radar, but it has started to take flight.
This index – which tracks business activity in Canada, much the way the vastly more famous Institute for Supply Management's manufacturing PMIs do in the United States – jumped to 52.8 on a seasonally adjusted basis in December from 47.5 in November, the University of Western Ontario's Richard Ivey School of Business reported Monday.
This is a so-called "diffusion" index, meaning that any reading above its mid-point of 50 indicates expansion of activity – growth, in other words. A reading below 50 – as the index had in November – implies contraction in economic activity. So, obviously, the reversal above 50 is an encouraging indicator, ending a three-month slide.
The Ivey PMI has gotten short shrift from Canadian market watchers for years, largely because up until a few years ago the index's keepers didn't seasonally adjust the data. Canada, in case you hadn't noticed, has some pretty distinct seasons, so this was a significant oversight – one the Ivey School finally corrected in March, 2011, when it first introduced a seasonally adjusted version of the index.
The old seasonally unadjusted version of the Ivey PMI was, at best, only a loose indicator of stock-market direction. But a look at the seasonally adjusted Ivey PMI, backdated to early 2009, shows that it has quite accurately reflected the changing moods of the S&P/TSX composite index.
The latest data reflect this phenomenon. The seasonally adjusted Ivey PMI has turned positive more or less in sync with stocks – even though the unadjusted Ivey actually continued lower last month.
The question, obviously, is whether the seasonally adjusted Ivey can build on a single month's upward momentum. Its history suggests it quite likely can. Since March, 2009, the seasonally adjusted index has only dipped below November's 47.5 four times – and in each previous instance, the negative reading was a prelude to a multi-month rebound into expansion territory. And each time, the stock market rose along with the recovering PMI numbers.
It's a fairly limited data series, to be sure. Nevertheless, the Ivey is pointing to an optimistic economic underpinning for Canadian stocks to begin 2013.
David Parkinson