The Purchasing Managers Index (PMI) is a closely watched economic indicator, but the value of this data has been called into question, with one economist telling CNBC it is wildly exaggerated.
Several pieces of euro zone PMI data were released on Monday. Spanish manufacturing PMI for June slipped to 54.7 from 55.4 in May, while the headline euro area manufacturing PMI came in at 57.4 for June, its highest reading since April 2011. Generally, a reading of 50 or above indicates the sector is expanding.
However, Paul Donovan, global economist and managing director at UBS Wealth Management, says the data is wildly exaggerated.
“We do not have 3.5 or 4 percent growth in Europe. We are not going to get 3.5 or 4 percent growth in Europe. That’s what the PMI numbers have been technically implying,” he told CNBC’s Squawk Box on Monday.
“What we are seeing is a correction in a rather dubious indicator, frankly. It’s a sentiment indicator, it’s not a real-world indicator, and it’s coming back down. We know people don’t fill in these surveys properly. We can prove they don’t fill them in properly looking at the export numbers.”
Donovan added survey reliability has been in decline in recent years, and has been exaggerated in the last 12 months. He said the data are due a correction.
Despite these criticisms, there are others who defend the data. Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said PMI data tends to lead industrial production data, and that plotting out upturns in PMI is consistently associated with upturns in industrial production growth.
“What often happens is that the PMI increases, which the market reacts to. Production growth then increases, but part of this response comes via upward revisions to previous data,” Vistesen told CNBC via email.
“This is of little help to markets which tend to look forward, but it shows that the PMIs are a useful short leading/real time indicator.”
Vistesen added that PMI data are a useful short leading indicator for real monthly activity, at least in the Eurozone.
Euro zone PMI data are wildly exaggerated: Economist