Economy

Purchasing Managers’ Index (PMI)

What is a Purchasing Managers Index?

The Purchasing Managers’ Index (PMI) is an index of the main direction of economic trends in the manufacturing and services sectors. It consists of a Diffusion Index that summarizes how purchasing managers perceive market conditions to be expanding, staying the same, or contracting. The purpose of PMI is to provide company decision makers, analysts and investors with information about current and future business conditions.

key takeaways

  • The Purchasing Managers’ Index (PMI) measures the main direction of economic trends in the manufacturing sector.
  • PMI is based on a monthly survey of supply chain managers in 19 industries, covering both upstream and downstream activities.
  • The value and movement of the PMI and its components can provide useful insights for business decision makers, market analysts and investors, and is a leading indicator of overall U.S. economic activity

Purchasing Managers’ Index (PMI)

How Purchasing Managers Indices Work

The PMI is prepared and published monthly by the Institute for Supply Management (ISM). The Purchasing Managers’ Index is based on a monthly survey sent to senior executives at more than 400 companies in 19 major industries, weighted according to their contribution to US GDP. The PMI is based on five main survey areas: new orders, inventory levels, production, supplier deliveries and employment. ISM weighs each of these areas of investigation equally. The survey includes questions about business conditions and any changes, whether improving, not changing, or deteriorating.

Primary PMI is a number from 0 to 100. A PMI above 50 indicates an expansion compared to the previous month. A PMI reading below 50 indicates contraction, while a PMI reading of 50 indicates no change. The further from 50, the greater the degree of change. PMI is calculated as follows:

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

Where:

P1 = percent of answers reporting improvements

P2 = percent of answers reporting no change

P3 = Percentage of answers reporting deterioration

Other companies also provide PMI data, including IHS Markit Group, which provides PMI for various countries outside the United States

How PMIs Affect Economic Decisions

The PMI and related data that ISM generates monthly from its surveys are key decision-making tools for managers in various roles. For example, an automaker makes production decisions based on new orders it receives from customers in the coming months. These new orders drive management purchasing decisions for dozens of components and raw materials such as steel and plastics. The on-hand inventory balance also drives the amount of production that manufacturers need to complete to fulfill new orders and keep some inventory at the end of the month.

Suppliers also make decisions based on PMI. Manufacturers’ parts suppliers follow PMI to estimate future demand for their products. Suppliers also want to know how much inventory their customers have on hand, which also affects the output their customers have to generate. PMI information about supply and demand affects the prices that suppliers can charge. For example, if a manufacturer’s new orders are growing, it may raise prices for customers and accept price increases from its suppliers. On the other hand, when new orders drop, manufacturers may have to lower their prices and demand that the parts they source cost less. Companies can use PMI to help plan their annual budgets, manage staffing levels, and forecast cash flow.

Investors can also use the PMI to their advantage, as it is a leading indicator of the state of the economy. The direction of PMI trends tends to precede changes in key estimated trends in economic activity and output, such as GDP, industrial production, and employment. Focusing on PMI values ​​and trends can yield profitable insights into the overall economic trends.

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