The Purchasing Managers’ Index (PMI) is a macroeconomic indicator based on a monthly survey of purchasing managers from the most relevant companies in a country. Its goal is to reflect the economic situation and evolution of that country by focusing on purchasing managers, as they are a reliable reflection of the market trend. This way, investors can obtain information directly from the experts.
This index is the first one published each month, unlike many government indicators that take longer to be released. Therefore, it provides first-hand knowledge about the market’s evolution.
The PMI is calculated based on surveys conducted on the most representative companies of the country, specifically, on the purchasing managers of these companies. The survey includes questions related to the following points:
New orders or commands, with a weight of 30%.
Occupancy, with a weight of 20%.
Production, with a weight of 25%.
Purchasing stock, with a weight of 15%.
Delivery terms from suppliers, with a weight of 10%.
Each of these questions has a weight as indicated to the right. Possible answers are: better, equal or worse.
With these five sub-indices and their weights, the PMI is calculated with values between 0 and 100, where 50 would be the central value. A value above 50 indicates positive changes compared to the previous period, and below 50, negative changes. The central value indicates no changes.
The PMI is a useful indicator for trading as it is reliable and is related to the Gross Domestic Product (GDP) and its evolution. In fact, predictions of this macroeconomic variable often change when this data is released. However, it has certain limitations, such as being focused only on the manufacturing sector and taking into account purchases and not other variables. Additionally, some people consider it susceptible to market panics as it affects the mood of purchasing managers.
The PMI is published for 30 countries by Markit Group and for the United States by the Institute for Supply Management. For example, in Spain, the PMI for April 2022 was 47.8, indicating a contraction in the manufacturing sector. In the United States, the PMI for the same month was 57.7, indicating an expansion in the manufacturing sector.
