The purchasing manager's index (PMI) is considered by many people to be a better indicator to predict the future economic performance than some GDP estimates, as it records the actual activities in the economy. Based on the records, we can see how confident the market is from the new order number. Recently the British PMI had a sharp fall in its PMI after the Brexit referendum, some economists argue that the fall in PMI overstates the effect caused by the Brexit vote; however, I believe it may not precisely predict the future economic performance but definitely shows the problem existing in the economy and the public opinion about the British economy after Britain leaves the European Union.
As PMI records the activities in the economy, a fall in PMI shows a decrease in the weighted sum of the numbers of new orders placed, the employment data and many other important economic information. I think the most important element is the number of new placed orders. This represents the increase in companies' receivables, which partially shows the future cash flow increase of the companies. Moreover, we probably should look into more details. Some orders might be some customer goods, but some orders are machinery and these orders represents the confidence of the companies about their future growth and future productive capacity. Moreover, the companies' recruitment decision is made based on their predicted future productions, which are estimated by the current data. In addition, some orders require longer period of production process, which could indicate the future growth of the certain businesses better.
Therefore, PMI is certainly a great indicator of predicting the future economic performance; however, the number of new placed order should be weighted more (could be risen up to 35% or even 40%) and orders should be put into more categories, which I believe can make it even a better indicator.
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