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Understanding US PMI as a Leading Indicator: Correlation Analysis GDP

How well do quarterly changes in PMI predict economic growth? An analysis of 10+ years of data (Q1 2015 - Q3 2025)

When it comes to tracking economic momentum, quarterly changes in Purchasing Managers' Index (PMI) data provide valuable signals about GDP growth. My analysis of over 10 years of data reveals which PMI indicators are the most reliable for economic forecasting.

Manufacturing PMI: Moderate but Significant

Both ISM and S&P Global manufacturing PMI show statistically significant correlations with manufacturing GDP growth, with S&P Global slightly outperforming.

Manufacturing PMI Growth Correlations

ISM Manufacturing PMI: r = 0.451 (p = 0.0027)
S&P Global Manufacturing PMI: r = 0.520 (p = 0.0004)
Figure 1: Manufacturing PMI Growth Correlations. Scatter plots show moderate positive relationships between quarterly PMI changes and manufacturing GDP growth.

Services PMI: The Superior Indicator

The services sector analysis reveals much stronger correlations. Given that services represent approximately 70% of US GDP, these findings have significant implications for economic forecasting.

Services PMI Growth Correlations

ISM Services PMI: r = 0.693 (p < 0.0001)
S&P Global Services PMI: r = 0.770 (p < 0.0001)
Figure 2: Services PMI Growth Correlations. The S&P Global Services PMI achieves a strong correlation of 0.770, explaining approximately 59% of quarterly GDP growth variance.

Key Takeaway

S&P Global Services PMI stands out as the strongest predictor, achieving what statisticians classify as a strong correlation (r > 0.7). Changes in this indicator can explain approximately 59% of the variance in quarterly services GDP growth.

Practical Implications

These findings suggest three practical strategies for economic analysis:

  • Prioritize services PMI: The strong correlation between services PMI changes and GDP growth makes this a primary indicator for tracking real-time economic conditions. Focus especially on S&P Global Services PMI.
  • Track quarter-over-quarter changes: A move from PMI 51 to 52 signals strengthening momentum more meaningfully than the absolute level. Focus on the direction and magnitude of change.
  • Watch for divergences: When manufacturing and services PMI trends diverge significantly, it often signals sectoral shifts that may not be immediately apparent in aggregate data.

Bottom Line

Quarterly changes in PMI data provide statistically significant information about economic growth, with services sector indicators substantially outperforming manufacturing. The S&P Global Services PMI, with its 0.770 correlation, should be a cornerstone of any real-time economic monitoring toolkit.

Methodology

Data: Manufacturing GDP (FRED: VAPGDPMFG), Services GDP (FRED: SRVPRD), ISM and S&P Global PMI series

Approach: Monthly PMI converted to quarterly averages; Pearson correlations calculated between PMI changes and GDP growth rates (Q1 2015 - Q3 2025)

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