Purchasing Manager Indexes (PMI) are produced by processing answers to questionnaires sent to purchasing managers of many companies and are one of the major economic indicators followed by investors.
The PMI indices provide a snapshot of the health of the manufacturing, services and construction sectors. The indications of purchasing managers are particularly important as they buy raw materials, semi-finished goods and in general everything their companies need to produce. They are therefore operators who need to be in control not only of the company’s operations, but also of the situation in the procurement and sales markets for their products and services.
The surveys sent to purchasing managers are then processed in statistical form so that the PMI indices take a value between zero and 100, where numbers above 50 indicate economic expansion, while those below that threshold indicate contraction.
What are the Main PMI Indices?
The most widely followed PMI index in the world is the one published every month by the Institute for Supply Management in the US, which is known by the acronym ISM. It is based on the ISM Manufacturing Report on Business, a monthly analysis based on a questionnaire filled out by purchasing and supply managers of US companies. The time series is very long and goes back to 1948.
The other major research institute that publishes PMI indices is S&P Global. Here, too, the data are monthly and are based on answers to a questionnaire of purchasing managers in the manufacturing, services and construction sectors. For the Eurozone PMI indices, approximately 5,000 private companies are involved and preliminary (flash) estimates are released followed by the final figure. The PMI indices for individual countries, including the UK, are also available. (See here for the latest Eurozone/UK PMIs). Flash estimates are often revised higher or lower after the event.
Pros and Cons of the PMI Indices
Among the main advantages of the PMI indices are their monthly frequency, the fact that real data are collected (unlike, for example, business confidence surveys such as the German IFO) and that they refer to orders, inventories, prices and employment, giving a concrete picture of the health of a sector.
PMI indices should not be used as the sole tool for making investment decisions because they do not include comprehensive data on different economic variables, such as the entire labour force, or inflation. Furthermore, the manufacturing sector used to be the most important sector, whereas today in many countries it is no longer a benchmark due to the advance of services. Consequently, composite indices and non-manufacturing indices may have greater significance.
In any case, PMI indices are a key indicator for investors to understand market sentiment and thus what the future direction of stock markets might be. They’re what economists call a “leading indicator” rather than a “lagging indicator” such as the unemployment rate.
