Econ Grapher

PMI - Purchasing Managers' Index

What is PMI?
The PMI or Purchasing Managers Index is a gauge of activity based on surveys of Purchasing Managers in the relevant economy, on a range of things like Production level, New orders, Inventories, etc. The use of the PMI is that it is high frequency (monthly), and usually contains certain sub-indexes which can be used to read the current situation (e.g. production) and future outlook (e.g. new orders). The index is a difusion index, so a reading at 50 or above indicates expansion in the sector. Typically the PMI will measure the manufacturing sector, but there are also services or non-manufacturing sector indexes.

How does it relate to Markets?
Naturally as a leading and coincident indicator and as one that is used for gauging wider economic activity the PMI is closely watched by the markets. Readings above (42 for GDP growth) 50 (Economic expansion) will be bullish, where as readings below will generally be bearish. But of course the trend is your friend - just look at some of the charts in the graph library (link below). What's most important is where the index has been trending e.g. if it was at 60, but comes in at 51, yes it is expansionary but such a drop would likely not be well received by the markets (but then it pays to look at the sub-indexes - see below). Also if the index came in at 55 but the market was expecting 60 it would also not be received well.

Components: Sub-indices
The various sub-indices that make up the PMI contain a wealth of information in themselves. For example the US ISM PMI has a number of key indexes in it that are particularly informative, e.g. the employment index will tell you if the sector is net hiring, the inventories index will tell you about where the inventory cycle is at, the new orders index will tall you what's in the pipeline, the prices index will tell you if prices are rising (it is a good predictor of CPI/Inflation). So the message is; make sure you look at the sub-indexes. The ISM index provides a good and transparent breakdown of the components on its website e.g. see the latest report on business.

Calculation methods
The PMI index is calculated as a diffusion index, which means the index can be a number ranging from 0 to 100, based on the balance of responses from respondents. For example in the prices index if 100% of respondents said prices are higher then the index would read 100, if 100% said prices were lower then the index would read 0, and if 100% said same it would be 50. The formula is Index = [Better % + (0.50 x Same %)]. For more on the ISM index read here, or read more on other diffusion index calculation.

Sources and further reading:
US ISM Purchasing Managers Index
Markit Economics PMI
HSBC Purchasing Managers' Index
Investopedia - PMI

Graph Library:
Metric - PMI

Original Source: http://www.econgrapher.com/encyclopedia-pmi.html

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