The Purchasing Managers Index – How Are You Doing?

The Purchasing Managers Index (PMI) is used as an indicator of economic activity. It is a reflection of how many purchasing managers have reported better than normal business conditions in any given month. A figure of 50 is average and anything below 50 means that the economy is contracting.

The first Purchasing Managers Index was defined in 1948 by the Institute of Supply Management (ISM) in the USA. It consisted of information from just 400 manufacturing purchasing managers.

It is now used by the financial markets as a key indicator of factory production and is considered by many to be a good snapshot picture of how factories are coping in the business environment. It does have the weakness that it only reports: fast, no change and slower.

The current Purchasing Managers Index is defined each month from over 40,000 members of the Institute for Supply Management, all of them in purchasing. Each member is surveyed every month about the state of the industry and can only answer “better”, “same” or “worse”.

The Purchasing Managers Index (PMI) is calculated by adding all the replies of “better” to those that answered “same”. This figure is then changed to a percentage. Thus, a PMI of 50 is equal to no change.

Although many Western countries no longer have large manufacturing industries, many politicians and economists recognize that this is where many recessions and decreases in Gross Domestic Product (GDP) emanate. Thus, a PMI of less than 50 is a clear indication of a future loss of GDP and a risk of recession.

Many western countries also have their own PMI – the Bank of England for example uses it as part of its economic monitoring when setting the United Kingdom bank rates. There are PMI’s in many industrialized countries including China, Japan, Australia and much of Europe. There is even a World PMI!

The PMI is also used in investment markets as an investment indicator. Bond markets believe that large increases in supplies being delivered are a pivot point for inflation so it is carefully followed.

The Purchasing Managers Index is a simply defined indicator that is used by governments, Federal and Country Banks as well as the investment industries and is considered extremely important to all of them.

 

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