The Purchasing Managers' Index (PMI) is an economic indicator that surveys purchasing mangers at businesses that make up a given sector. The most common PMI surveys are the manufacturing PMI and the services PMI, which are released for the United States and many other developed countries around the world, including the eurozone.
Investors use PMI surveys as leading indicators of economic health, given their insight into sales, employment, inventory and pricing. After all, manufacturing purchasing trends reacting to consumer demand are the first visible sign of a slowdown. As the first major survey released each month, they are also one of the most highly watched economic indicators.
Calculating the Purchasing Managers' Index
The Purchasing Managers' Index is calculated using several different surveys that are compiled into a single figure depending on one of several possible answers to each question. While these questions and answers may differ depending on the surveyor, the two most common surveyors are the Institute of Supply Management (ISM) and Markit Group.
The most common elements included are:
- New Orders
- Factory Output
- Suppliers' Delivery Times
- Stocks of Purchases
And the most common answers are:
- No Change
The actual formula used to calculate the PMI assigns weights to each common element and then multiplies them by 1.0 for improvement, 0.5 for no change, and 0 for deterioration. As a result, a reading of above 50.0 suggests an improvement, while a reading of below 50.0 suggests deterioration in either the manufacturing or services sectors.
The Purchasing Managers' Index and Investors
The Purchasing Managers' Index is an extremely important indicator for international investors looking to form an opinion on economic growth. In particular, many investors use the PMI as a leading indicator for Gross Domestic Product (GDP) growth or decline. Even the central banks use this indicator extensively, as evidenced in the minutes published by the Federal Reserve.
When it comes to predicting GDP growth, a sustained reading of higher than 42.0 is considered to be the benchmark for economic expansion. Meanwhile, a sustained reading of below 42.0 could indicate that an economy is heading into a recession. The difference between 42.0 and 50.0 can indicate the strength of an economic recovery.
Individual components of the PMI can also be useful in various markets. For instance, the bond markets watch growth in supplier deliveries and prices paid, since these figures can provide insight into the potential for inflation. Since bonds are fixed income assets, inflation has a detrimental effect that can erode their prices.
Finding Purchasing Managers' Index Data
The Purchasing Managers' Index is published in a variety of different places, depending on the company and country. For instance, both Markit and ISM publish PMI data for the United States, while China's Bureau of Statistics provides its own set of figures. In general, most investors trust the two most popular sources - ISM and Markit - for PMI data.
Here are links to these two popular sources:
Key Takeaway Points
- The Purchasing Managers' Index (PMI) is an economic indicator that surveys purchasing mangers at businesses that make up a given sector.
- Investors use PMI surveys as leading indicators of economic health, given their insight into sales, employment, inventory and pricing.
- Generally, a prolonged reading above 42.0 is considered to be the benchmark for economic expansion, while a reading below could indicate a coming recession.
- Individual components of the PMI can be very useful in predicting things like inflation.