The Purchasing Manager Index (PMI) assesses the business conditions of the manufacturing and service sectors of a country.
The PMI is used to measure the change in the spending of business firms.
About 500 purchasing managers are asked to grade the relative level of business conditions regarding employment, level of inventory and new orders, state of production, and supplier deliveries.
A reading above 50 indicates growth in the sector. Conversely, a reading below 50 points to a contraction.
What is PMI?
The PMI is a composite index that is based on five major indicators:
- New orders
- Inventory levels
- Production
- Supplier deliveries
- Employment environment.
Each indicator has a different weight and the data is adjusted for seasonal factors.
The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries.
A PMI index over 50 indicates that manufacturing is expanding, while anything below 50 means that the industry is contracting.
Why is PMI important?
The PMI report is an extremely important indicator of the financial markets as it is the best indicator of factory production.
The index is popular for detecting inflationary pressure as well as manufacturing economic activity.
The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month, it is very timely.
Should the PMI report an unexpected change, it is usually followed by a quick reaction in the market.
One closely watched part of the report is growth in new orders, which predicts manufacturing activity in future months.