The Magic Number

July 1, 2009
Risk takers will be further ahead when the economy recovers than those who play it safe.

Sometimes, standing still is more costly than making a mistake. While some companies put off improvements until the coast is clear, leading organizations are in continuous motion. Even when times are tough, they continue to look for ways to make their operations more resilient and competitive.

So, if you're waiting for all the numbers to line up, you could be knocked out of the game before it begins.

When you hit rock bottom, there's nowhere to go but up, and if that's true, recent reports of solid bedrock should lead us to conclude the worst is over. Problem is, nobody seems to agree which number best secures our economic future.

Ask the Institute for Supply Management (ISM), and it will say the Purchasing Managers Index (PMI) is a reliable measurement of the state of the economy because it uses data from U.S. manufacturing — production levels, new orders, supplier deliveries, inventories and employment. The PMI has a “magic number” that defines a threshold. A PMI above 50 means manufacturing is expanding, and general economic growth is supposed to follow. The PMI grew in each of the last six months, slowly from January's low of 35.6 and then more rapidly in recent months to reach 44.8 in June. According to ISM, this trend means manufacturing is still contracting but at a slower pace. We're getting closer to the magic number, but we're not there yet.

However, some argue the best indicator is the unemployment rate, which rose to 9.5% in June. The Department of Labor reported large declines in manufacturing, professional and business services and construction, so that paints a bleaker picture than the PMI. This grim employment situation might be causing a slump in another important indicator: the Consumer Confidence Index. After making some recent gains, that number suddenly dropped from 54.8 in May to 49.3 in June.

If you think more reliable numbers can be gleaned from your industry peers, you can turn to the annual Manufacturing and Wholesale Distribution national survey conducted by accounting, tax and business consulting firm RSM McGladrey. Of the more than 920 manufacturing and wholesale distribution executives responding, 46% said they expect their companies to rebound later this year, and 44% expect a turnaround in early 2010.

Want numbers specific to material handling equipment? You're covered there, too. The latest figures from the Material Handling Industry of America's Material Handling Equipment Manufacturing Forecast show new orders declining 18% to 20% this year and another 10% next year, with recovery out of sight until early 2011. That's not nearly as optimistic as the PMI data for general manufacturing.

So, which number should you bet on? I say none of them. Despite our sophisticated economic indicators, surveys, reports and statistical markers, we still can't eliminate risk with a magic number. Strategic moves must be made without assurances, safety nets or knowledge of consequences.

That's a risky way to conduct business, especially when all you see are contradictory indicators. But think of it as a game of chess. You have to make moves without knowing the outcome. Good chess players can work through a number of possible moves and devise a strategy or response to each potential outcome. The further ahead they can plan, the more successful they are. Like the ISM, chess also sets a threshold at 50. When both sides stop advancing — no pieces are captured and no pawns move — for 50 consecutive moves, the game is a stalemate. The final score is zero, and that's a number no one should bet on.