Quantifying the Qualitative Responses of the Output Purchasing Managers Index in the US and the Euro Area

33 Pages Posted: 6 Feb 2012

Date Written: January 24, 2012

Abstract

The survey based monthly US ISM production index and Eurozone manufacturing PMI output index provide early information on industrial output growth before the release of the official industrial production index. I use the Carlson and Parkin probability method to construct monthly growth estimates from the qualitative responses of the US ISM production index and the Eurozone manufacturing PMI output index. I apply the method under different assumptions on the cross-sectional distribution of output growth using the uniform, logistic and Laplace distribution. I show that alternative distribution assumptions lead to very similar estimates. I also test the performance of the different growth estimates in an out of sample forecasting exercise of actual industrial production growth. All growth estimates beat a simple autoregressive model of output growth. Distribution assumptions again matter little most of the time except during the financial crisis when the estimates constructed using the Laplace distributional assumption perform the best. My findings are consistent with recent findings of Bottazzi and Sechi (2006) that the distribution of firm growth rates has a Laplace distribution.

Keywords: diffusion index, forecasting, purchasing managers’ surveys, ISM, PMI, qualitative response data, Carlson-Parkin method

JEL Classification: C18, E27

Suggested Citation

Vermeulen, Philip, Quantifying the Qualitative Responses of the Output Purchasing Managers Index in the US and the Euro Area (January 24, 2012). ECB Working Paper No. 1417. Available at SSRN: https://ssrn.com/abstract=1991116

Philip Vermeulen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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