Purchasing Managers’ Index (PMI)

Purchasing Managers’ Index (PMI)

• The PMI is a monthly diffusion index that signals expansion or contraction in business activity.
• Readings range from 0 to 100: above 50 = expansion, below 50 = contraction, 50 = no change.
• Manufacturing PMI weights new orders, production, employment, supplier deliveries, and inventories equally.
• The index is used by corporate managers, suppliers, investors, and analysts to guide production, inventory, hiring, pricing, and macro forecasts.

What the PMI Measures

The Purchasing Managers’ Index (PMI) summarizes month-to-month changes in business conditions based on surveys of purchasing and supply-chain managers. It captures whether activity is expanding, steady, or contracting and is presented as a single headline number that reflects the breadth and direction of change.

There are sector-specific PMIs:
– Manufacturing PMI (published by the Institute for Supply Management, ISM): equal-weighted components are new orders, production, employment, supplier deliveries, and inventories.
– Services (non-manufacturing) PMI (ISM): covers sectors such as transportation, insurance, construction, and education.
– Hospital PMI (ISM): focuses on inventories, supplies, and patient traffic.
– Global PMI (compiled by S&P Global): derived from surveys of tens of thousands of firms worldwide and represents a broad measure of global economic activity.

How the PMI Is Calculated

PMIs are diffusion indexes based on monthly survey responses from senior executives across industries. Respondents report whether indicators (e.g., new orders, production) are improving, unchanged, or deteriorating compared with the prior month. The results are weighted—often by sectoral contribution to GDP—and converted into an index on a 0–100 scale:
– >50 indicates expansion versus the prior month
– =50 indicates no change
– <50 indicates contraction

The farther the reading is from 50, the stronger the pace of change.

Who Uses the PMI and Why

• Corporate managers: adjust production, inventory, staffing, and purchasing plans based on trends in new orders and inventories.
• Suppliers: forecast customer demand and set production schedules and inventory cushions.
• Investors and analysts: use PMI as a leading indicator of broader economic metrics such as GDP, industrial production, and employment.
• Policymakers and economists: monitor PMIs for real-time signals about economic momentum and potential turning points.

How PMI Affects Pricing and Business Decisions

PMI reflects supply-and-demand balance. When new orders and demand are rising, manufacturers may raise prices and tolerate higher input costs. Conversely, falling orders can prompt price cuts and pressure suppliers for lower prices. Firms also use PMI trends to:
– Plan annual budgets
– Manage staffing and overtime
– Forecast cash flow and capital spending

Interpreting PMI Readings

• Readings above 50: expansion; the higher the number, the stronger the expansion.
• Readings below 50: contraction; readings closer to 0 imply more severe contraction.
• Persistently rising or falling PMIs provide forward-looking signals about business cycles and can precede changes in GDP, employment, and industrial output.

Bottom Line

The PMI is a concise, timely indicator of business conditions derived from purchasing and supply-chain managers. Because it is released monthly and covers multiple sectors, PMI is widely used by managers, suppliers, investors, and economists to assess economic direction and inform operational and strategic decisions.