The purchasing managers' index (PMI) is an economic indicator based on surveys of businesses in 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 members of the Eurozone.
Understanding the PMI can provide insight into recent market conditions and identify potential economic slowdowns.
What Is the Purchasing Managers' Index?
The purchasing managers' index consists of several different surveys of purchasing managers at businesses in manufacturing or services. These surveys are compiled into a single numerical result depending on one of several possible answers to each question. The exact questions and answers on the surveys vary based on the surveyor, with the two most common surveyors being the Institute of Supply Management (ISM) and IHS Markit.
The most common elements include:
- New orders
- Factory output
- Suppliers' delivery times
- Stocks of purchases
The most common answers include:
- No change
Most economic indicators look at historical data to draw conclusions, but economic surveys offer a glimpse into the future, making them especially valuable to investors that want predictive value rather than looking to the past.
Investors use PMI surveys as leading indicators of economic health, given their insight into sales, employment, inventory, and pricing. Manufacturing sector purchases tend to react to consumer demand and are often among the first visible signs of a slowdown. They are also some of the most highly watched economic indicators since they are often the first major survey released each month.
How Does the PMI Work?
The PMI is a diffusion index, meaning that it measures change across multiple indicators. A diffusion index is particularly useful for identifying economic turning points, such as unemployment reporting from the Bureau of Labor Statistics.
The purchasing managers' index is a diffusion index that indicates whether economic conditions are better or worse at the companies surveyed. The formula used to calculate the PMI assigns weights to each common element and then multiplies them by 1 for improvement, 0.5 for no change, and 0 for deterioration.
Here is how the formula appears:
PMI = (P1*1) + (P2*0.5) + (P3*0)
P1 = Percentage of answers reporting improvement
P2 = Percentage of answers reporting no change
P3 = Percentage of answers reporting deterioration
A reading above 50 suggests an improvement, while a reading below 50 suggests deterioration. The groups also divide the survey into the manufacturing and services sectors since manufacturing is export-dependent, and services are more sensitive to the domestic economy.
What It Means for Individual Investors
The purchasing managers' index is an important indicator for international investors looking to form an opinion on economic growth. In particular, many investors use the PMI as a leading indicator of gross domestic product (GDP) growth or decline. Central banks also use the results of PMI surveys when formulating monetary policy, which can be seen in the Federal Reserve's minutes.
In general, higher PMI levels correlate with higher GDP. 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 various markets. For instance, the bond markets watch the 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. Investors interested in specific sectors may also look at the purchasing trends within their specific vertical markets.
How to Find PMI Data
The purchasing managers' index is published in a variety of different places, depending on the company and country. For instance, both IHS 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 IHS Markit—for PMI data.
International investors can find the latest PMI data for other countries by using websites like Trading Economics. PMI data is also widely reported in the financial news media, which means that investors can easily check into the implications of any changes.
If the PMI moves lower in a given country, investors may want to consider reducing their exposure to the country's equity markets and increasing exposure to other countries' equities with growing PMI readings. It also helps to look at price-related data when analyzing the impact of potentially higher inflation on international bonds. In general, higher inflation readings mean that investors may want to reduce their exposure to the bond market, given the potential for lower prices.
- The purchasing managers' index surveys purchasing managers at businesses in sectors like manufacturing and services.
- Common surveyors include the Institute of Supply Management (ISM) and IHS Markit Group.
- Analysts and investors use the PMI to forecast GDP growth.