What Is the Purchasing Managers' Index (PMI)
How the PMI Helps Investors
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.
The purchasing managers' index (PMI) is an economic indicator that surveys purchasing managers 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 members of the Eurozone.
Investors use PMI surveys as leading indicators of economic health, given their insight into sales, employment, inventory, and pricing. After all, manufacturing sector purchases tend to react to consumer demand and are often the first visible sign of a slowdown. They are also among the most highly watched economic indicators since they are often the first major survey released each month.
Calculating the Purchasing Managers' Index
The purchasing managers' index consists of several different surveys that 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 Markit Group.
The most common elements include:
- New orders
- Factory output
- Suppliers' delivery times
- Stocks of purchases
The most common answers include:
- 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. A reading above 50.0 suggests an improvement, while a reading below 50.0 suggests deterioration. The groups also divide the survey into the manufacturing and services sectors since manufacturing is export-dependent and services is more sensitive to the domestic economy.
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 of gross domestic product (GDP) growth or decline. Central banks also use the results of PMI surveys when formulating monetary policy, which can be clearly seen in the Federal Reserve's minutes.
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 and vice versa for a decline in GDP.
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.
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.
International investors can find the latest PMI data for other countries by using websites like TradingEconomics. PMI data is also widely reporting 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 into other countries' equities with growing PMI readings. They may also want 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.