22) Economic Indicators: Purchasing Managers Index (PMI)

What It Is

The Purchasing Managers Index (PMI) is a composite report of five sub-indexes extracted from surveys covering more than 400 purchasing managers all over the US. It is a monthly report of the previous month’s data that is handled by the Institute for Supply Management (ISM), a non-profit organization with over 40,000 members in the supply management and purchasing professions.

The PMI covers the manufacturing sector only. There is a similar report, called the PMI Non-Manufacturing Business Report, which covers other industries.

Basic Information

The five sub-indexes of the PMI and their weights are:

1.    New Orders (from customers) – 0.30

2.    Production Level – 0.25

3.    Employment Level – 0.20

4.    Supplier Deliveries – 0.15

5.    Inventories – 0.10

The survey done on the purchasing managers comes in three choices; they can answer with “better”, “same” or “worse” to questions asked of them regarding the industry. The results of the PMI, which is a figure between 0 to 100, are then calculated by taking a portion of respondents that answered with “better conditions” than the previous month, and adding it to the total half of the percentage of respondents that answered a “no change”. A PMI reading of 50, therefore, will mean that there is an equivalent number of managers who answered “better conditions” and “worse conditions”.

How the Report Is Valuable

Manufacturing is no longer a big part of the total GDP, but recessions usually begin and end in this industry. For this reason, the PMI is a closely-followed report that it sets the tone for the coming month and other indicator releases.

Since the PMI is measured in a number between 0 to 100, a reading of 50 and above is evidence that the industry is growing. This means that there is also growth in the economy in general. It is considered a good indicator for future GDP levels. Another number to watch in a PMI report is 42 (and higher, but not over 50). The levels between 42 and 50 serves as a benchmark of how the industry is holding up. If it falls below 42 this means that recession may hit soon. Reading the results in context is also important. Even if the figure is still above 50, if the previous month before this reading was higher, then it is taken as a setback by the market.

The PMI is one of the leading national indicators to the Fed. It is always mentioned in the FOMC minutes publicly released after its meetings.

Things to Watch Out For

The PMI is itself a hybrid indicator. It has both actual data elements and a confidence element (Consumer Confidence Index). As such, the answers can be subjective as it may not relate to events, but more on perceptions. It is valuable to investors looking to get a sense of actual experience and see the PMI index level itself.

Growth in supplier deliveries and prices paid areas of the PMI report have been historical pivot points for inflation. This is seen by bond markets as a good indicator to move ahead in anticipation of an interest rate movement.

It is most useful when taken in context with more data-driven indicators, such as the Producer Price Index and GDP, or in conjunction with the ISM Report Non-Manufacturing Report on Business.

This report is best when viewed together with data-driven indicators such as GDP and Producer Price Index.