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What is PMI and why is it important?

What is PMI and why is it important?

2020-06-16 • Updated

Information is not investment advice

Purchasing Managers’ Index (PMI) is an indicator that measures the economic health of the manufacturing sector. The aim of the Index is to provide information about current business conditions to company analysts, purchasing managers, decision makers.

It is based on five main indicators such as inventory levels, production, supplier deliveries, new orders and the employment environment.

How is the information gathered?

There are two main producers of PMI. They are the Institute for Supply Management that produces metrics for the US and the Markit Group that does it for over 30 countries worldwide. So they hold surveys monthly sending them to purchasing executives at nearly 300 companies. The purchasing managers answer questions about different elements of the survey, measuring each of them like “improvement”, “no change”, “deterioration”.

There is a special formula that assigns weights to each element and then multiplies them by 1.0 for improvement, 0.5 for no change, and 0 for deterioration. At the end, the number above 50.0 indicates industry expansion, below this figure – contraction.

Pros and Cons of the PMI

Pros

  1. It is delivered monthly and during the current month (or just several days after it).
  2. It gives a good prediction of future data, such as GDP and official authorities’ manufacturing reports.
  3. Report shows point changes from the previous data.
  4. The same metrics are applied to all countries, it helps to compare countries’ data.

Cons

  1. It is subjective in its data.
  2. In the US regional reports are delivered earlier and can have high correlations and take some of the steam out of this release.

Why is it so important?

Someone can think that this Index is not so important because it is just a survey based on opinions of managers. However, it is one of the most crucial indicators for investors looking for clues about economic growth. They use this measure as a leading indicator of GDP growth or decline. What is more important is that central banks use these data when formulating monetary policy.

Not only the whole PMI data, but its individual components can be used in different markets. For example, the bond market watches the growth in supplier deliveries and prices paid, because figures can give information about inflation.

The Index is important not only for manufacturing but for the whole economy, as manufacturing is the important part of it.  

So if the PMI goes lower in a given country, investors may consider reducing their exposure to the country’s equity markets and increasing it into other countries’ equities with rising PMI reading.

PMI economic calendar

Euro area releases flash PMI data for manufacturing and services around 3 weeks into the current month. These indicators are released by France, Germany and the currency union itself and usually make a great impact on the euro. Later on the first day of the next month, Markit publishes final readings of European PMIs. However, this time the euro exchange rate is not so easily influenced.

In America, ISM manufacturing PMI is released on the first business day after the month ends. For services, ISM non-manufacturing PMI comes out on the third business day after the month ends.

UK PMI readings are announced in the first days of each month for the previous month. They always come in the same order: manufacturing, construction, services. Services industry plays a more important role in the UK economy than in economies of the EU and the US, that is why services PMI is considered as more crucial in the UK.

As for China, there are two kinds of PMI: Caixin manufacturing PMI and official manufacturing PMI. Caixin manufacturing PMI is released on the first business day after the month ends. Manufacturing PMI data appears on the last day of the current month. Official manufacturing PMI tends to have more impact when it is released ahead of the Caixin Manufacturing PMI because the reports are tightly correlated. These data affect not only traders who trade on CNY, but NZD and AUD as well.

Conclusion

Although the PMI is the indicator that is measured on a survey base, it is one of the main indexes that displays economic growth and helps trader and investors to forecast. The main advantage of the Index is that it is released faster than other official data. Also, businesses react quickly to market conditions, and their purchasing managers hold the most current and relevant information about the economy.

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