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The Purchasing Managers Index (PMI) is an indicator that shows the conditions of the manufacturing sector as well as the general health of the economy. The information for calculating the index is obtained through a monthly survey with several purchasing managers in different sectors. These managers are asked to state 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 be above 50 if economic activity is increasing, below 50 if activity is contracting, and if the reading is only 50 it would mean that activity has remained neutral.
In the manufacturing industry, purchasing managers are responsible for purchasing the products needed for manufacturing. When the economy is growing strong, orders for manufactured goods typically increase. Thus, purchasing managers will respond by ordering new supplies needed for the production of goods so that they can meet the increased demand. If the economy does 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 the international level, there are other equivalents of the PMI, such as Canada’s Ivey index. All 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 manufacturing output represents more than 80% of the world’s total manufacturing output.
In the United States, the purchasing managers index is administered by the ISM, which publishes it on the first business day of each month. The ISM surveys 400 purchasing managers in 20 industries, from food manufacturers to furniture. The surveys produce purchasing managers’ index data on new orders, production, jobs, supplier performance, and inventories. Activity will increase in a strong economy, it will decline in a weak economy, and the index will typically reflect what is happening.
When the purchasing managers’ index is released, it gives telltale signs of how the economy is doing. The index can also be useful in predicting where the economy might be headed. It is an important indicator of economic activity, so the purchasing managers index is used by many people, including economists and financial market participants. The latter will use it as one of the tools to assist in making 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 gauge the health of the manufacturing sector as well as the economy. A reading above 50 means that the manufacturing sector and economy are growing. A reading below 50 but above 43 will indicate that activity in the manufacturing sector is shrinking, but overall economic health could still be fine. A reading below 43, however, usually means that the economy may already be in recession or very close.