Purchasing Managers’ Index or PMI is an economic indicator, which is derived after monthly surveys of different companies. The index shows trends in both the manufacturing and services sector. The index helps in determining whether the market conditions, as seen by purchasing managers, is expanding, contracting or staying the same. It is used to provide information regarding the current and future business conditions.
PMI is one of the closely watched indicators of business activity and helps in predicting the economic health of a country. There are two types of PMI — Manufacturing PMI and Services PMI. A combined index is also made using both manufacturing PMI and services PMI.
How is the manufacturing PMI derived?
The PMI is derived by sending fact-based questions to a large number of companies in the concerned sector. For manufacturing PMI, the questionnaire is sent to manufacturing companies. The questions are factual in nature and the survey is not meant for opinions, intentions, or expectations. The questions are related to 5 key variables. The variables with their weights in the index are — new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stock of items purchased (10%). The surveys are conducted on a monthly basis.
A PMI number greater than 50 indicates expansion in business activity. A number less than 50 shows contraction. The rate of expansion is also judged by the difference from the mid-point (50) and also by previous month’s data.
PMI was started for the first time by US-based Institute for Supply Management (ISM) in 1948. The Singapore Institute of Purchasing and Materials Management (SIPMM) produces the index for Singapore, while IHS Markit produces the index for 30 other countries. IHS Markit produces the PMI for India. The IHS Markit India Manufacturing Purchasing Managers’ Index measures the performance of India’s manufacturing sector. The index is derived after a survey of 500 manufacturing companies.
PMI is a good indicator of the economic activity in any country. Usually PMI is released before other indexes such as GDP, industrial output. PMI gives an idea about the direction the economy is taking and helps economists in predicting the manufacturing activity in the country. The manufacturers and suppliers use the index to decide on their production needs based on new orders in the coming months. The index also helps investors who are looking to invest in the stock markets as it helps in determining the economic health of the country.