Purchasing Manager’s Index, or PMI, is an indicator of overall economic and business activities that consists of a diffusion index and used for indicating the prevailing business trends in the manufacturing and service sectors. This is based on the monthly survey of senior executives across primary industries a month before it is published and is calculated separately for both manufacturing and services industries
before producing the composite index.
How is this Index calculated?
This index gets its data from the qualitative questionnaire from the surveys of a large pool of executives where questions range from the output, new orders, business expectations, and employment. The data is then compiled in percentage terms and then calculated by:
PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)
P1 = percentage of answers reporting an improvement
P2 = percentage of answers reporting no change
P3 = percentage of answers reporting a deterioration
The index lies between 0 and 100. The following table shows the characteristics of the market prediction for the month for which the index is calculated:
1. Used by the finance professionals to analyse the performance of the sector or the economy as a whole. This is also used by investors to make investment decisions.
2. Economists and western thinkers recognize PMI as a potent indicator of the health of the economy, changes in GDP and recession.
3. From producers to suppliers, PMI helps them to determine their expected future output, the effect of demand on the price, and cost-cutting if required.
Example- if the PMI < 50, this implies that the economy or the business environment is contracting then the producers and the suppliers will decrease their prices by cost-cutting methods and if PMI > 50, then they will gain by raising their selling prices.
4. The Bank of England uses its own PMI for monitoring economy for the purpose of determining the UK bank rates.
PMI plays an important parameter for determining the flow of cash and FDI internationally. Countries with a PMI > 50 attract huge FDIs. In the bond market, the PMI helps the international investors to track recessionary movements.