Purchasing and Supply Managers Provide Early Clues on the Direction of the US Economy: An Application of a New Market-Timing Test

Abstract

We evaluate the directional accuracy of the Institute for Supply Management indices to predict the US economy direction with a method developed by Pesaran and Timmermann (2009). By illustrating an application of the new market-timing test, we show that the Non-Manufacturing Index is a useful predictor of an increase/decrease and acceleration/deceleration in monthly economic activity, whereas the renowned Purchasing Managers’ Index is not. Our findings suggest that the non-manufacturing sector is important when examining US business cycles.