Purchasing Managers’ Index (PMI) – Explained

Introduction

The Purchasing Managers’ Index (PMI) is an indicator produced by Markit Group and the Institute for Supply Management of financial activity reflecting purchasing managers’ acquisition of goods and services.

Markit Group and the Institute for Supply Management compile The Purchasing Managers’ Index (PMI) surveys on a monthly basis by polling businesses that represent the make up of the respective sector. The surveys cover private sector companies, but not the public sector.

Purchasing Managers Index or PMI is an indicator of purchasing that companies plan to do of goods and services. It is used as an indicator to assess demand by businesses. Hence, any sharp surge in the index is an indicator that the demand for goods and services is likely to go up. It is based on a survey of purchase managers of companies.

The Reserve Bank of India monitors both manufacturing and services PMI indices. If it falls sharply, it helps the central bank to form a view on interest rates. RBI could look at cutting rates if the PMI is very low for a consistently long period of time.

PMI data are calculated as follows:
INDEX = (P1*1) + (P2*0.5) + (P3*0)
 P1 = Percentage number of answers that reported an improvement.
 P2 = Percentage number of answers that reported no change.
 P3 = Percentage number of answers that reported a deterioration.

Thus, if 100% of the panel reported an improvement the index would be 100.0. If 100% reported deterioration the index would be zero. If 100% of the panel saw no change the index would be 50.0 (P2 * 0.5).

Therefore, an index reading of 50.0 means that the variable is unchanged, a number over 50.0 indicates an improvement while anything below 50.0 suggests a decline. The further away from 50.0 the index is, the stronger the change over the month. E.g. a reading of 55.0 points to a stronger increase in a variable than a reading of 52.5.

PMI vs. IIP

PMI is a survey-based measure of the top 500 companies. It’s usually the bigger firms that are able to capture the improvements in the economy first. The IIP data, however, is for the entire manufacturing sector, including a sizeable small-scale sector. PMI serves as a leading indicator and the IIP numbers should start showing an improvement in the future. The IIP, DIPP (Department of Industrial Policy and Promotion) says, gives growth in physical units produced while the PMI is a perceived index based on business expectations showing only expansion or contraction.
Globally, too, the PMI is considered an important macroeconomic indicator.

Manufacturing, Construction and Services are three parameters on which PMI numbers are released. The PMI surveys are released  shortly after the end of the  reference period.  Manufacturing data are  generally released on the 1st  working day of the month,  followed by construction on  the 2nd working day and  services on the 3rd working  day. e.g. July Manufacturing PMI is released on 1st August (If working Day) and so on for other aspects.