What is the Purchasing Managers' Index (PMI)?
The Purchasing Managers’ Index (PMI) is an important economic tool used to measure the economic performance of production sectors. It is considered a leading indicator of the economic condition, especially in the manufacturing sector.
The index is based on monthly surveys sent to purchasing managers and executives in about 400 companies across roughly 20 different economic activities. It reflects market trends through five main areas:
1. New Orders
2. Inventory Levels
3. Production
4. Employment Environment
5. Supplier Deliveries
The PMI aims to provide a quick and early reading of economic conditions, making it a vital tool for investors and decision-makers to understand market trends and predict economic growth or contraction.
In the United States, the index is issued monthly by the Institute for Supply Management (ISM), through several sub-indices covering different sectors. A reading above 50 points indicates growth activity, while a reading below 50 signals a decline or contraction.
Why do investors care about the PMI?
PMI is one of the most anticipated indicators in financial markets, especially in the forex market, because it provides early signals about the health of the economy and its impact on central bank policies, such as raising or lowering interest rates. Changes in this index can directly affect the movement of currencies and stocks.
Types of PMI:
Like many other economic indicators that give a deeper idea about the stability of a country’s economy, there are several sub-indices derived from the main PMI to study specific sectors for a clearer and deeper insight alongside the main index:
• Manufacturing PMI: focuses on the manufacturing sector.
• Services PMI: reflects the performance of the services sector.
• Non-Manufacturing PMI: determines the activity level of purchasing managers in all sectors except manufacturing.
• Construction PMI: measured in some countries like the UK, it focuses on the construction sector.
• Business PMI (in New Zealand): specializes in measuring the activity in the services sector and production growth.
PMI Data:
• Index Name: Purchasing Managers’ Index (PMI)
• Type of Index: Production Index
• Issuing Authority: Institute for Supply Management (ISM) – United States
• Release Timing: Monthly, on the first working day after the end of each month
• Market Impact Strength: Very High
• Market Reaction:
o If the reading is higher than expected or the previous one = positive impact on the currency
o If the reading is lower than expected or the previous one = negative impact on the currency
How is the PMI measured?
The PMI is measured based on data collected from executive managers in the companies included in the study. This information is analyzed to provide a final numerical value on a scale from 0 to 100. The number 50 is the threshold used to interpret the state of economic activity in the sector.
If the PMI reading is above 50, it indicates expansion or growth in economic activity compared to the previous month. A reading below 50 indicates contraction or decline. If the reading is exactly 50, it means there is no change in the pace of economic activity from the previous month. The closer or farther the number is from 50, the more accurate the analysts’ understanding of the size of the change in economic performance, whether toward growth or decline.
How does PMI affect the forex market?
The PMI has a strong influence on the forex market because of the valuable information it provides about the state of the economy and company performance. For example, when a company like a car manufacturer receives new orders from customers, these orders push the company to make decisions to buy more raw materials such as plastic, steel, glass, and modern manufacturing technologies.
At the same time, the company adjusts its inventory of raw materials and products in production carefully to meet the increased demand. These changes don’t only affect the company but also extend to suppliers who hurry to provide the necessary materials to ensure the continuity of the production process, as well as retailers who prepare to receive and offer the products to the final consumers.
Therefore, the PMI data reflect this complex dynamic between supply and demand, making companies heavily rely on it when planning their annual budgets, forecasting cash flows, determining employment levels, and making other strategic decisions. For this reason, PMI is one of the economic indicators closely followed by forex markets, as it guides currency movements based on economic growth expectations and industrial performance.
