The Purchasing Managers’ Index (PMI) is a monthly survey of purchasing managers in different sectors that indicates the condition of the manufacturing sector and overall economy. A reading above 50 indicates growth, below 50 indicates contraction, and 50 means neutral. The index is used by economists and financial market participants to make investment decisions. A reading below 43 usually means the economy is in or close to a recession.
The Purchasing Managers’ Index (PMI) is an indicator that shows the condition of the manufacturing sector and the overall health of the economy. The information for calculating the index is obtained through a monthly survey of several purchasing managers in different sectors. These managers are asked to indicate whether activity has increased, decreased, or remained unchanged in the following areas: new orders, production, employment, supplier performance, and inventories. When released, the Purchasing Managers’ Index will read above 50 if economic activity is growing, it will read below 50 if activity is contracting, and if it reads simply 50 then it means that activity has remained neutral.
In the manufacturing industry, purchasing managers are responsible for purchasing the products needed to manufacture goods. When the economy is strengthening, orders for manufactured goods typically increase. Thus, purchasing managers will respond by ordering new supplies needed to produce goods so they can meet the increased demand. If the economy is doing poorly, demand for manufactured goods will decline. These managers are well positioned and able to assess activity in the manufacturing sector.
This index has roots in the early 1930s in the United States and was created by the National Association of Purchasing Managers, which is now called the Institute of Supply Management (ISM). At an international level, there are other PMI equivalents, such as the Ivey index in Canada. All of these indices perform more or less the same function. In addition, there is the Global Purchasing Managers Index, which covers approximately 30 countries whose combined production represents more than 80% of total world production.
In the US, the Purchasing Managers’ Index is administered by the ISM, which releases it on the first day of business each month. ISM surveys 400 purchasing managers in 20 industries, from food manufacturers to furniture. Surveys produce purchasing managers index data on new orders, production, employment, supplier performance, and inventories. Activity will increase in a strong economy, decrease in a weak economy, and the index will typically reflect what is happening.
When the Purchasing Managers’ Index is released, it provides telltale signs of how the economy is doing. The index can also be useful in predicting where the economy may be heading. It is an important indicator of economic activity; therefore, the Purchasing Managers’ Index is used by many people, including economists and participants in financial markets. The latter will use it as one of the tools to help make investment decisions. This is mainly because the Purchasing Managers’ Index has been a useful tool that indicates major turning points in the economic cycle.
Index users will look for specific readings to also assess the health of the manufacturing sector and the economy. A reading above 50 means that the manufacturing sector and the economy are experiencing growth. A reading below 50 but above 43 will indicate activity in the manufacturing sector is shrinking, but overall economic health could still be good. A reading below 43, however, usually means that the economy may already be in a recession or very close to it.
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