The Purchasing Managers’ Index, or PMI, provides information on current and future business conditions. It is an economic indicator calculated based on monthly surveys of various companies. It helps determine whether market conditions are expanding, contracting, or remaining the same from the purchasing managers’ perspective.
The PMI is obtained by sending fact-based questions to a large number of companies in the relevant sector. The questions are fact-based and relate to 5 key variables: new orders (30%), production (25%), employment (20%), supplier delivery times (15%), and inventory purchased (10%).
The PMI indicates the direction in which the economy is heading and helps economists forecast manufacturing activity in the country. The PMI is usually published before other data, such as GDP and Industrial Production. As a rule, the Index is published once a month and shows trends in both the manufacturing and service sectors.
How to read the Manufacturing and Services PMI data?
The PMI data should be evaluated on three levels:
- Estimate the value concerning level 50;
- The dynamics of business activity from month to month;
- Compare the actual value with the forecasted one.
If the PMI dynamic is increasing from month to month and the value is above 50, it means an expansion of business activity in the sector. This usually happens during periods of economic growth. If the month-to-month dynamics are falling, but the value is above 50, it indicates that the level of business activity in the sector is declining, but the situation is under control.
If PMI is falling from month to month and the value is below 50, it indicates a contraction of business activity in the sector. This usually happens during recessionary periods. If month-to-month dynamics are rising, but the value is below 50, it indicates that the level of business activity is still weak, but there are signs of recovery.
If the actual value is better than the forecast, it is positive for the market. If the actual value is worse than the forecast, it can be considered by the market as negative.
Let’s look at a concrete example. Last week on Thursday (June 23), the leading European countries (France, Spain, Italy, and Germany) released PMI data for the manufacturing and service sectors. In almost all countries, the data were lower than the last month’s and worse than analysts’ forecasts. As a result, the European currency fell sharply and closed the day with a red candle. But the values are still above the 50 levels, indicating that even though things are getting worse, the level of business activity is still high. This is a more medium-term parameter. Typically, when the level of business activity falls below 50, central banks begin to ease monetary policy to keep the economy from recession.
