DEFINITION of Purchasing managers index (PMI)
Purchasing managers’ index (PMI) is an indicator that measures the economic health of the manufacturing sector.
WHAT IT IS IN ESSENCE
The aim of the Index is to provide information about current business conditions. Company analysts, purchasing managers, decision makers use this.
Purchasing managers’ index (PMI) is based on five main indicators.
Inventory levels, production, supplier deliveries, new orders, and the employment environment.
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.
HOW TO USE
It is one of the most crucial indicators for investors looking for clues about economic growth. They use the PMI index measure as a leading indicator of GDP growth or decline.
The PMI Index is important not only for manufacturing but for the whole economy, as manufacturing is an 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.
Investors use PMI surveys as leading indicators of economic health, given their insight into sales, employment, inventory, and pricing.
After all, manufacturing sector purchases tend to react to consumer demand and are often the first visible sign of a slowdown.
They are also among the most highly watched economic indicators since they are often the first major survey released each month.
The Purchasing Managers’ Index consists of several different surveys.
They are compiled into a single numerical result depending on one of several possible answers to each question.
The exact questions and answers on the surveys vary based on the surveyor.