Purchasing managers index definition

What is a purchasing managers index?

A purchasing managers index (PMI) is an economic indicator comprised of monthly reports and surveys from private sector manufacturing firms. The index surveys product managers, who are the individuals that buy the materials needed for a company to manufacture its products.

PMIs are used by investors to provide a clear idea of what purchasing managers think about the future of their industry. The results of a PMI can inform market sentiment and provide the basis for trading decisions.

How does a purchasing managers index work?

A purchasing managers index works by compiling data from purchasing managers in the manufacturing sector. This data is used it to assess industry conditions and provides an insight into the possible future growth – or lack of – in the sector. One prominent organisation which produces PMIs is the Institute for Supply Management (ISM).

For its PMI, the ISM contacts purchasing managers at more than 300 manufacturing firms of various sizes, and which are based in different locations.

PMI calculation

PMIs are calculated by surveys, which ask purchasing managers whether they think business and industry conditions have improved, remained constant or deteriorated compared to the previous month.

The surveys give equal weighting to several categories, which are scored individually by the purchasing managers who take part. Categories include the number of new orders, sector production, supplier deliveries, company inventories and employment figures.

The purchasing managers’ responses are combined to give an overall score for that month’s PMI. A score of more than 50 indicates an expansion of the manufacturing sector, a score of less than 50 indicates a decline, and a score of 50 indicates no change from the previous month.

What are the benefits of using PMIs?

One of the benefits of using PMIs is the fact that they are composed of data-based responses to questions about actual business conditions. This means that the findings in a PMI are based on hard data rather than opinion or confidence-based measurements.

PMIs can be effective indicators of economic health thanks to the insights into employment, orders, inventories and growth provided by purchasing managers.

Another benefit of using PMIs is that they are often the first batch of economic data to be released each month, meaning that they are an early indicator for industry growth from the previous month.

What are the drawbacks of using PMIs?

PMI reports can only be used to asses the health of the manufacturing sector, rather than the entire workforce.

While the manufacturing sector used to be considered a vital benchmark for global economies, especially the US, its importance has been gradually declining. Other monthly reports, such as the non-manufacturing report on business – a survey of the US services sector – have become more widely used as barometers for economic health.