Daily Digest:
w/c 17 June 2024: The US data highlight this week is Retail Sales on Tuesday, with global Flash PMI data on Wednesday. Plus on the central bank side we get the RBA, PBoC, SNB and BoE all in play

Purchasing Managers’ Index (PMI) Explained

Beginner

What is the PMI?

The PMI or Purchasing Managers’ Index compiles a survey of economic trends for a country in sectors such as manufacturing and services. The data is released monthly and is one of the first and most current data sets to be released. The composite PMI compiles the surveys to give an outlook of the whole economy. The PMI data is an index, with a number between 0 and 100.

The survey is sent to the purchasing managers of leading companies across a range of industries. It covers a variety of business conditions with responders noting whether conditions for specific areas are expanding, contracting or staying the same in the latest month.

The Manufacturing PMIs are usually released on the first trading day of the month, with the Services PMIs released two days later. For some countries, there are flash PMIs (early readings) released a week before the month-end. These are then followed up with final PMIs in the first week of the new month.

Who produces the data

PMIs are produced by several data sources. In the US, the ISM (Institute of Supply Management) is the primary source for compiling the data. The ISM PMI for the US is considered to be tier-one data.

However, other companies such as IHS Markit and Standard & Poors also produce PMIs that market participants will follow for countries across the world. In China, the official government PMI looks at large corporates, but traders also watch for the Caixin PMIs that look at medium sizes companies in China.

PMI calculation Here is the formula used in the calculation:

PMI calculation

Where:

P1 = the percentage of answers reporting an improvement in conditions

         P2 = the percentage of answers reporting no change in conditions

         P3 = the percentage of answers reporting a deterioration in conditions

For example, in a PMI survey, 48% of responders answered “improving” (i.e. P1), 22% of responders answered “no change” (i.e. P2) and 30% of responders answered “deteriorating” (i.e. P3). In this instance the calculation would be:

PMI =(48 x 1) + (22 x 0.5) + (30 x 0)
PMI =48 + 11 + 0
PMI =59

Reading the PMI

The calculation produces a number between 0 and 100, with anything above 50 suggesting expansion and anything below 50 suggesting contraction. A reading of 50 suggests no change.

The larger the number above 50, the stronger the expansion. If the number is also higher than the previous month it suggests the expansion is accelerating.

Why is it important?

The PMI is a “soft data” release. This means it is a survey of opinion and not formed from hard economic data (such as employment or inflation data). Despite this, it is also considered to be a leading indicator for the economy.

The PMI is one of the most up-to-date assessments of economic activity. It is data that will be considered by companies when making decisions over future purchasing, prices to charge and other crucial business decisions. Analysts and traders use PMIs to indicate trends in the economy. Furthermore, central banks will also consider PMIs when formulating their economic outlook for monetary policy decisions.

Other PMI components to watch

The headline PMI is the most important number. However, it is possible to delve a little deeper into the data and see what’s going on under the hood. As we said earlier, the purchasing managers are asked for any improvement, deterioration or no change across a variety of aspects of their business. These include:

  • Production levels
  • New Orders
  • Supplier deliveries (prices paid)
  • Inventories
  • Employment

The outlook for these components can indicate industry trends in employment, future growth (new orders) and inflation (prices paid). This information is used by economists, analysts and traders to form a view of the direction of the economy. Ultimately this feeds into the outlook for central bank monetary policy.  

Market reaction to the PMIs

As is always the case, market expectations are key for reading the PMIs. Trends in the data are important for the macro picture, but when it comes to trading the data, it is all about whether market forecasts have been beaten or missed.

Under normal market conditions, higher than forecast PMI is likely to be:

  • Positive for domestic bond yields
  • Positive for the local currency
  • Positive for equities

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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