:max_bytes(150000):strip_icc()/PMI--f77e0dc1e4fe49b5985b22d1f5494bc0.jpg "Understanding the Purchasing Managers’ Index (PMI) for Economic Insight")
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Key Takeaways
- The PMI is based on a monthly survey of supply chain managers.
- The PMI ranges from 0 to 100; above 50 signals expansion.
- The ISM publishes a Hospital PMI surveying inventory and healthcare traffic.
- Global PMI represents 90% of global GDP through surveys from 28,000+ companies.
- High PMI readings indicate economic growth; below 50 indicates contraction.
Zoe Hansen / Investopedia
Exploring the Purchasing Managers’ Index (PMI)
A monthly Purchasing Managers Index (PMI) for the manufacturing sector is developed by the Institute for Supply Management (ISM), a nonprofit supply management organization. The ISM also tallies a monthly PMI for the service sector and hospitals.
It is a diffusion index that summarizes whether market conditions are expanding, staying the same, or contracting, as viewed by purchasing managers.
Fast Fact
The Purchasing Managers’ Index (PMI) indicates economic health for sectors like manufacturing.
How the PMI Functions in Financial Markets
The manufacturing PMI gives equal weight to new orders, production, employment, supplier deliveries, and inventories. The ISM services PMI includes information compiled from non-manufacturing sectors, such as transportation, insurance, construction, and education. A PMI provides insight into the business environment and helps companies see where the economy is headed.
The ISM Report on Business contains PMIs based on surveys. Each PMI is calculated based on responses from senior executives at multiple companies across various industries, which are weighted by their contribution to the U.S. gross domestic product (GDP). The surveys include questions about business conditions, whether or not they are changing, and whether they are improving or deteriorating.
The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, while a reading at 50 indicates no change. The further away from 50, the greater the level of change.
Fast Fact
The ISM also publishes a Hospital PMI, which surveys inventory levels, supplies, and healthcare patient traffic.
Who Utilizes the PMI and Why?
- Corporate Managers: They may use the monthly PMI results to make key decisions about future business. For example, an automobile manufacturer makes production decisions based on new orders that drive purchasing decisions about parts and raw materials. Existing inventory balances also drive the amount of production the manufacturer needs to complete to fill new orders and to keep some inventory on hand at the end of the month.
- Suppliers: A manufacturer’s parts supplier follows the PMI to estimate future demand. The supplier must determine how much inventory its customers have on hand, which affects the production that its clients generate.
- Investors: PMI is a leading indicator of economic conditions. The direction of the trend in the PMI may signal changes in the estimates of economic activity and output, such as GDP, industrial production, and employment.
Fast Fact
A company can use the PMI to help plan its annual budget, manage staffing levels, and forecast cash flow.
What Is the Impact of PMI Information on Pricing?
PMI information about supply and demand might affect the prices that suppliers can charge. If new orders increase, then a manufacturer may raise customer prices and accept a supplier’s price increases. When new orders decline, the manufacturer may lower its prices and demand a lower cost for the parts it purchases.
What Is the Global PMI?
The Global PMI is an economic indicator compiled by S&P Global, derived from survey responses from over 28,000 global companies, and represents 90% of global GDP.
What Is the Significance of a High PMI Reading?
The Purchasing Managers’ Index can range between 0 and 100. If the index reading is higher than 50, then it indicates an economic expansion. A reading below 50 indicates an economic contraction, with readings closer to 0 indicating a higher degree of contraction. A reading equal to 50 signals no change in the environment.
The Bottom Line
Investors, economists, and analysts have a wealth of information to help them gauge where the economy is trending. One leading indicator is the Purchasing Managers’ Index.
Released monthly, the PMI is derived from a survey by the Institute for Supply Management for the manufacturing, services, and healthcare sectors. The results are used by managers, suppliers, and investors in their decision making.
