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The Purchasing Managers’ Index – Why It Affects You

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The Purchasing Managers’ Index (PMI) is a monthly survey which indirectly measures the level of factory output in an economy. As a leading economic indicator, it is often used by stock analysts, fund managers and economists to make predictions on stock prices and economic growth.

Who are Purchasing Managers?

Purchasing managers are professionals in the manufacturing industries, who make decisions on how much raw materials to order and how much output to produce, based on orders they receive. Purchasing managers are usually identified by national supply chain associations. For instance, China’s PMI is released by the China Federation of Logistics and Purchasing, while the U.S.’s PMI is compiled by the Institute of Supply Management.

Why not track economic output directly?

Figures on economic output are often available only at the end of a period. For example, the value of factory output may be compiled by individual factories, which then submit them to the respective trade associations. Government agencies then compile, verify and interpret the figures across various industries before publishing them.

The process of compiling such data takes time and several months may have passed between the first sign of a change in economic sentiment and the actual availability of economic data to substantiate a view on economic growth or decline.

Economic output figures are thus a lagging economic indicator.

Why is the PMI a good measure of manufacturing activity?

The PMI is arrived at by directly tracking the response of purchasing managers in five areas: production level, new orders from customers, speed of supplier deliveries, inventories and employment level. If more purchasing managers are reporting increases compared to those reporting otherwise, the PMI would show an increase.

A PMI above 50 strongly suggests that an economic expansion is underway. The PMI may continue to increase as second-tier manufacturers (who act as suppliers to bigger manufacturers) receive more orders from their customers.

Although the PMI is not a precise measure of factory output, it gives a strong and early indication of where the economy is headed.

What benefits from a rising PMI?

Since the PMI measures mainly factory output, manufacturing companies are typically the beneficiaries of a rising PMI. In particular, a country’s industries which are highly correlative to economic cycles will likely experience an expansion when that country’s PMI starts to increase.


Last Updated ( Thursday, 25 February 2010 16:09 )  
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