The Purchasing Manager’s Index, or PMI, was first developed in 1948 by the Institute of Supply Management, a US-based organization. It is currently one of the most closely followed measures of global corporate activity.
What is PMI?
The purchasing manager’s index is used to measure survey responses from businesses and economic activity. The manufacturing PMI and the services PMI are the two most common PMI surveys. These are available for the United States and many other wealthy countries, including Eurozone members.
Understanding the PMI can help you understand recent market conditions and spot possible economic slowdowns. For example, you may use the PMI to assess how manufacturing companies are doing and then use their growth or fall to derive conclusions about the economy as a whole.
How Does PMI Work?
Multiple purchasing managers’ surveys at companies that provide goods and services make up the purchasing manager’s index. Based on the multiple potential responses to each question, the results of these surveys are combined into a single numerical result. Depending on the surveyor, different questions and answers appear on the surveys. The Institute of Supply Management (ISM) and IHS Markit are the two most often used survey companies.
The most typical survey questions are:
- New orders
- Industrial output
- Employment
- Delivery schedules for suppliers
- Stocks of purchases
The most typical responses are:
- Improvement
- No change
- Deterioration
Most economic indicators base their findings on past data. Economic surveys provide a sight into the future, making them particularly beneficial to investors who like to look ahead rather than backward when making investment decisions.
Investors rely on PMI surveys as early indications of the economy’s health. They provide information on price, inventory, sales, and employment. Purchases made by the manufacturing sector often signal the beginning of a recession since they typically respond to consumer demand. Because they usually are the first significant surveys to be issued each month, they are also some of the economic indicators that are most closely monitored.
PMI of United States (Source: The Global Economy)
How To Find PMI Data?
Different places publish the purchasing manager’s index depending on the company and country. For instance, IHS Markit and ISM publish PMI data for the United States. The Bureau of Statistics of China has its own collection of data. ISM and IHS Markit, the two most often used sources of PMI data, are generally recognized by investors.
International investors can use websites like Trading Economics to discover various countries’ most recent PMI data. Investors may quickly research the effects of any changes because the financial media constantly reports on PMI data.
Investors might want to think about limiting their exposure to the country’s stock markets if the PMI in that country declines. Rising PMI data can boost their exposure to stocks in other countries. When examining the effect of potentially greater inflation on overseas bonds, it also helps to look at price-related statistics. Investors may generally wish to reduce their exposure to the bond market when inflation estimates are higher since lower prices may be on the way.
How is PMI Calculated?
The PMI tracks change across a number of variables since it is a diffusion index. An economic turning point can be identified using a diffusion index and other indicators from the Bureau of Labor Statistics, such as unemployment rates.
The PMI might indicate whether business conditions at the firms assessed are improving or deteriorating. Each common factor is given a weight in the formula that determines the PMI, which multiplies those weights by 1 for improvement, 0.5 for no change, and 0 for deterioration.
The formula appears as follows:
(P1*1) + (P2*0.5) + (P3*0) = PMI
P1 = The percentage of responses that reported improvement
P2 = The percentage of responses that indicated no change
P3 = The percentage of responses that indicate deterioration
A value over 50 indicates progress. A value of less than 50 indicated deterioration. Considering that industry depends on exports while services are more vulnerable to local economic conditions, the groups divide the survey into the manufacturing and services sectors.
Takeaways
- The Purchasing Manager’s Index was first developed in 1948 by the Institute of Supply Management.
- The PMI is used to measure survey responses from businesses and economic activity.
- Multiple purchasing managers’ surveys at companies that provide goods and services make up the purchasing manager’s index.
- The Institute of Supply Management (ISM) and IHS Markit are the two most often used survey companies.
- An economic turning point can be identified using a diffusion index and other indicators from the BLS, such as unemployment rates.
