Purchasing Managers Index

The Purchasing Managers Index (PMI) is an indicator for economic activity. Roughly speaking it reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.

A PMI index over 50 indicates that the economy is expanding while anything below 50 means that the economy is contracting.

Composition of the PMI

The original PMI is issued since 1948 by the Institute for Supply Management in Tempe, AZ. The data for the index are collected through a survey among 400 purchasing managers in the manufacturing sector on five different fields, namely, production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Respondents can report either better, same or worse conditions than previous months.

For all these fields the percentage of respondents that reported better conditions than the previous months is calculated. The five percentages are multiplied by a weighing factor (the factors adding to 1) and are added.

Currently, PMI’s for other economic sectors and other geographical zones are issued by different organizations.

Uses of the PMI

The PMI report is an extremely important indicator for the financial markets as it is considered the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely.

Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.

Strengths

Extremely timely, the PMI is released one working day after the month to which it refers.
The PMI is often used to help predict the Producer Price Index which is released later in the month.

By many it is considered to be the best snapshot of the factory sector. It is a very worth while thing to do and is a big benefit in the long run.

Weaknesses

The survey gives three possible responses - fast, same, slower. Therefore results are not that specific.

The index leaves out employment costs, which are a large portion of manufacturing costs.