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Purchasing Managers’ Index (PMI)

Purchasing Managers’ Index (PMI)

Why in news?

  • The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) was at 55.5 in April 2021, little changed from March’s reading of 55.4.

Purchasing Managers’ Index

  • PMI is an indicator of business activity — both in the manufacturing and services sectors.
  • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
  • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

Producers of Purchasing Manager’s Index (PMI)

  • There are three principal producers of Purchasing Manager’s Index (PMI) namely
  • Institute for Supply Management (ISM) – Established in 1915, Headquartered in Arizona, USA
  • Singapore Institute of Purchasing and Materials Management (SIPMM) – Established in 1972, Located in Singapore
  • IHS Markit Group – Located in London. IHS was established in 1959, Markit merged with IHS in 2016.

Calculation of PMI

  • Purchasing Manager’s Index (PMI) = [P1 * 1] + [P2 * 0.5] + [P3 * 0]
  • In the above formula,  P1 is equal to the percentage of answers that are reporting an improvement.
  • P2 represents the percentage of answers with no change whereas, P3 is the percentage of answers having a deterioration.
  • Purchasing Manager’s Index (PMI) focuses mainly on the five major Survey Areas:
    • Employment
    • New orders
    • Production
    • Inventory levels
    • Supplier deliveries
  • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
  • The PMI is a number from 0 to 100.
    • PMI above 50 represents an expansion when compared to the previous month;
    • PMI under 50 represents a contraction, and
    • A reading at 50 indicates no change.

Implications of PMI for the economy

  • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
  • It is, therefore, considered a good leading indicator of economic activity.
  • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
  • Central banks of many countries also use the index to help make decisions on interest rates.
  • The PMI also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a- vis another competing economy.

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