The Purchasing Managers Index is a commonly seen indicator of economic trends in the manufacturing and services sectors.
Purchasing Managers Index
Concept
Purchasing Managers Index in English is Purchasing Managers” Index; abbreviated as PMI.
Watching: What is PMi?
The Purchasing Managers’ Index (PMI) is a commonly seen indicator of economic trends in the manufacturing and services sectors. It includes a diffusing indicator that summarizes whether market conditions are observed by purchasing managers, are expanding, holding or contracting.
The purpose of PMI is to provide information on current and future business conditions to business planners, analysts and investors.
How to calculate PMI
PMIs are collected and released monthly by the Institute of Supply Management (ISM). The PMI is based on a monthly survey of senior executives at more than 400 companies across 19 key industries weighed by their contribution to US GDP.
The PMI is based on five key survey areas: new orders, inventory levels, production, supplier deliveries, and the labor environment. The ISM gives equal consideration to each survey area. The surveys include questions about business conditions and any changes whether it is improving, unchanged or worsening.
The PMI heading is a number between 0 and 100. A PMI above 50 represents an expansion when compared to the previous month. A PMI reading below 50 indicates contraction and a reading at 50 indicates no change. The further away from level 50, the greater the degree of change. PMI is calculated as follows:
PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)
in there:
P1: percentage of answers reporting improvement
P2: percentage of responses reported unchanged
P3: percent of responses reporting decline
Other companies also issue PMI numbers (like the IHS Markit Group) that issue PMIs for different countries other than the US.
How PMI affects economic decisions
PMIs and related data released monthly by the ISM from surveys are important decision-making tools for managers in a variety of roles. For example, an automaker makes production decisions based on the new orders it expects from its customers in the following months.
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The new orders boosted management’s spending decisions on dozens of parts and raw materials such as steel and plastic. The current inventory balance also drives the amount of cars the manufacturer needs to complete to fulfill new orders and keep some inventory at the end of the month.
Suppliers also make decisions based on PMI. A parts supplier to a manufacturer uses PMI to estimate future demand for their products. Suppliers also want to know how much inventory their customers have, which also affects the amount of production that must be produced for the customer.
Supply and demand PMI information affects the prices a supplier can charge. For example, if a manufacturer’s new orders are increasing, it can increase the customer’s purchase price and accept a price increase from suppliers.
On the other hand, when new orders are falling, manufacturers may have to lower prices and demand lower parts costs. A company can use PMI to help with annual budget planning, staff level management, and cash flow forecasting.
Investors can also use PMI to their advantage as it is a leading indicator of economic conditions. The trend indicator in PMI tends to precede changes in the trend of key estimates of economic activity and output (such as GDP), industrial production and employment.
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Paying attention to the value and movements of PMI can provide foresight beneficial in developing trends in the economy as a whole.
