The Purchasing Managers’ Index (PMI) is a leading indicator of economic trends in the manufacturing and service sectors. Released monthly by the Institute for Supply Management (ISM), this vital diffusion index provides a snapshot of market conditions, revealing whether they are expanding, static, or contracting.
Key Takeaways
- The Purchasing Managers’ Index (PMI) serves as a gauge for current economic trends in the manufacturing sector.
- It is based on a monthly survey of supply chain managers across 19 industries, capturing both upstream and downstream activities.
- Movements in the PMI provide invaluable insight to business decision-makers, market analysts, and investors.
- As a leading indicator, the PMI offers foresight into overall economic activity in the U.S.
The Formula and Calculation of PMI
The PMI is calculated using the formula:
PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)
Where:
- P1 = percentage of answers reporting an improvement
- P2 = percentage of answers reporting no change
- P3 = percentage of answers reporting a deterioration
Other organizations, like IHS Markit Group, also release PMI figures for various countries around the globe.
How the PMI Works
As a pivotal economic tool, the PMI is one of the most reliable leading indicators of the U.S. economy. Based on responses from senior executives of over 400 companies in 19 primary industries, the data reflects business conditions based on several key areas:
- New orders
- Inventory levels
- Production
- Supplier deliveries
- Employment
The headline PMI ranges from 0 to 100, with values above 50 indicating economic expansion and readings below 50 signifying contraction. Values precisely at 50 denote no change. The further away the reading from 50, the more substantial the level of change.
The PMI results are typically released on the first Monday of each month.
Using the PMI for Decision Making
Corporate Managers
Managers can utilize the PMI for critical decisions within their businesses. For example, an automobile manufacturer might adjust production levels based on expected new orders, affecting procurement of raw materials such as steel and plastic.
Suppliers
Suppliers monitor the PMI to predict future demand and inventory needs, thus managing their own production and pricing strategies accordingly.
Investors
Investors use the PMI as a leading indicator of economic health, predicting changes in GDP, industrial production, and employment trends, assisting in making informed investment decisions.
Interpreting PMI Readings Globally
Current U.S. Manufacturing PMI
In April 2024, the Manufacturing PMI registered at 49.2%, a decrease from 50.3% in March 2024, indicating a slight contraction in economic conditions.
Global PMI
The Global PMI, derived from surveys involving approximately 28,000 companies in over 40 countries, represents an impressive 89% of global GDP.
High and Low PMI Readings Explained
- A PMI above 50 signals economic expansion, with values closer to 100 reflecting robust growth.
- A PMI below 50 denotes contraction, with figures nearing 0 indicating significant economic slowdown.
- A reading of 50 indicates stability with no significant change.
Conclusion
The PMI is an invaluable tool for investors, economists, and analysts looking to gauge the economic landscape. Issued monthly by the Institute for Supply Management, it provides key insights from over 400 companies regarding current economic conditions, indicating whether expansion or contraction is on the horizon.
Related Terms: GDP, Diffusion Index, Leading Indicator, Economic Expansion, Economic Contraction.
References
- Institute for Supply Management. “April 2024 Manufacturing ISM Report On Business.”
- S&P Global. “Purchasing Managers’ Index™ (PMI™) data – Frequently Asked Questions”.
