Purchasing Managers’ Index – An Economic Barometer

Purchasing Managers’ Index, (PMI™) series are monthly economic surveys of carefully selected companies. This index provide an advance signal of what is really happening in the private sector economy by tracking variables such as output, new orders, employment and prices across key sectors.

The PMI methodology was developed to resolve issues caused by the following deficiencies and weaknesses in many official economic indicators:

  1. Inconsistent methodologies between nations and regions. Making like for like comparisons between nations or regions difficult.
  2. Infrequent releases and delays in publication.
  3. Difficulties in providing coverage for the whole economy.
  4. Frequent and ongoing revisions.

Coverage: Survey indices

For manufacturing sector, below is the headlines for the PMI being calculated from a weighted average of:

  1. Output
  2. New Orders
  3. Employment
  4. Suppliers’ Delivery Times
  5. Stocks of Purchases
  6. Input Prices
  7. Output Prices
  8. Backlogs of Work
  9. Future Activity
  10. Quantity of Purchases
  11. Stocks of Finished Goods
  12. New Export Orders

Who should be using PMI?

The PMI™ is widely seen as an accurate and timely indicator of business conditions that helps Analysts and Economists to correctly anticipate changing economic trends in official data series. Such as gross domestic products, GDP, industrial production, employment and inflation.

Because of PMI data are sometimes released months ahead of comparable official data then the PMI surveys are ranked among the world’s most market moving economic data releases.

How to use PMI?

The leading indicator for PMI reference is ’50’ index. Let says the index is exceeding 50 index, the said economy (for particular sector or country) is expanding. However, when the index falls below 50 index then the said economy is experiencing contraction.

Take a look on Caixin China PMI as shown below. Starting 2020, the index was undergoing contracting as China has implemented lockdown. This in turn has made lots of factories closing their operation. Indirectly causes PMI to go down below 50 index.

As the lockdown was relaxed somewhere in February, you can see that index is climbing very sharply to 50 ish index. This represent the factories are opening their businesses again and starting to achieve previous operating condition.

Caixin China Purchasing Managers' Index
Caixin China Purchasing Managers’ Index

Is it reliable?

Well, Certainly. Take the case of Caixin China PMI. The Caixin China General Manufacturing PMITM is compiled by IHS Markit from responses to questionnaires sent to purchasing managers in a panel of around 500 private and state-owned manufacturers.

The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. For the purposes of this report, China is defined as mainland China, excluding Hong Kong SAR, Macao SAR and Taiwan.

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