Definition and Examples of the Purchasing Managers’ Index (PMI)
How does the Purchasing Managers’ Index (PMI) work?
What does this mean for individual investors?
How to find PMI data
Definition and Examples of the Purchasing Managers’ Index (PMI)
The Purchasing Managers’ Index (PMI) measures survey responses from businesses and is used to assess economic activity. The most common PMI surveys issued are PMI surveys in manufacturing and PMI surveys in services. These surveys are released for the United States and many other advanced countries, including members of the Eurozone.
Understanding the PMI can provide insight into current market conditions and identify potential economic slowdowns. For example, you can access the PMI to see how manufacturing is performing and use their progress or decline to draw conclusions about the economy as a whole.
How does the Purchasing Managers’ Index (PMI) work?
The Purchasing Managers’ Index consists of several surveys of purchasing managers in companies in the manufacturing or services sectors. These surveys are compiled into a single numerical score based on one of the possible responses to each question. The specific questions and responses in the surveys vary based on the issuing entity. The most common issuers are the Institute for Supply Management (ISM) and IHS Markit.
The key common elements of the survey are: new orders, factory production, employment, supplier delivery times, and purchase inventories.
The common responses include: improvement, no change, and deterioration.
Most economic indicators look at historical data to draw conclusions. Economic surveys provide a glimpse into the future, making them an additional value for investors who wish to predict what is coming rather than look at the past.
Investors use PMI surveys as leading indicators of economic health. They provide insights into sales, employment, inventories, and pricing. Manufacturing sector purchases tend to react to consumer demand and are often among the first signs of slowdown. They are also among the most closely watched economic indicators, as they are the first major surveys released each month.
How to calculate the Purchasing Managers’ Index (PMI)
The PMI is a diffusion index, which means it measures change across several indicators. A diffusion index is very useful for detecting economic turning points, such as unemployment rates from the Bureau of Labor Statistics.
The PMI can indicate whether economic conditions are better or worse in the surveyed companies. The formula used to calculate the PMI applies weights to each common element and then multiplies it by 1 for improvement, 0.5 for no change, and 0 for deterioration.
Here’s how the formula appears:
PMI = (P1*1) + (P2*0.5) + (P3*0)
P1 = the percentage of responses indicating improvement
P2 = the percentage of responses indicating no change
P3 = the percentage of responses indicating deterioration
A reading above 50 indicates improvement. A reading below 50 indicates deterioration. The difference also divides the survey into manufacturing and services sectors, where manufacturing relies on exports, and services are more sensitive to the local economy.
What does this mean for individual investors?
The Purchasing Managers’ Index is an important indicator for international investors looking to form an opinion on economic growth. Many investors use the PMI as a leading indicator of GDP growth or decline. Central banks also use PMI survey results when determining monetary policy, as evidenced in the minutes of Federal Reserve meetings.
Note: Generally, higher PMI levels are associated with higher GDP growth rates. However, the relationship between PMI and GDP varies based on the country’s stage of economic development.
Individual components of the PMI can also be useful in markets. Bond markets monitor supplier delivery growth and payment prices. These figures can provide insights into potential inflation. Since bonds are fixed-income assets, inflation has a negative impact that can erode their prices. Investors with specific sector interests may also look at purchasing trends within vertical markets.
How to
Finding PMI Data
The Purchasing Managers’ Index (PMI) is published in various places, depending on the company and the country. For example, both IHS Markit and ISM publish PMI data for the United States. The Chinese National Bureau of Statistics provides a specific set of numbers. In general, most investors trust the more reputable sources – ISM and IHS Markit – for PMI data.
International investors can find the latest PMI data for other countries using websites like Trading Economics. PMI data is also widely provided by financial media, allowing investors to easily check the implications of any changes.
If PMI decreases in a specific country, investors may want to consider reducing their exposure to the stock markets of that country. They can increase their exposure to stocks from other countries with rising PMI readings. It is also useful to consider price-related data when analyzing the potential impact of inflation on international bonds. Generally, higher inflation readings mean that investors may want to reduce their exposure to the bond market, given the likelihood of falling prices.
Source: https://www.thebalancemoney.com/what-is-the-purchasing-managers-index-pmi-1978996
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