A technical note for The Guardian

Surge in business activity hampered by supply shortages

OK.

Britain’s economy surged ahead in June as private-sector businesses secured extra work and created thousands of new jobs, but analysts warned cost pressures were mounting for companies amid labour shortages and continuing disruption to global supply chains. The flash IHS Markit/Cips purchasing managers’ index, a closely watched barometer of private sector activity, fell slightly to 61.7 in June from 62.9 in May.

By the standards of these things that’s stunningly high. But then we’d expect that at present. Further, this is a reduction in the speed of growth – closer to acceleration than velocity. Above 50 is growth, below shrinkage. The higher the number the faster the growth, a fall in it to 61.7 shows that the growth isn’t as fast as it was but it’s not contraction.

OK, now the technical detail. Supply shortages actually push the PMI up. By construction, if supply times rise that’s taken as an indication of increased growth. Because, if growth does surge then we’re likely to see rises in supply times. So, the construction of the index takes an increase in supply times as being evidence of faster growth.

Fine, an index can be constructed any way anyone wants. But it is necessary to understand how it is. In this case supply shortages are evidence for the surge in business activity, not a hampering……

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