Understanding Purchasing Managers Index (PMI)
Table of Contents
Introduction to PMI
The Purchasing Managers' Index (PMI) is a leading economic indicator derived from monthly surveys of private sector companies. It provides valuable insights into the economic health of both manufacturing and services sectors, making it one of the most closely watched indicators by traders and economists.
PMI is a diffusion index, meaning it measures the proportion of respondents reporting positive changes versus negative changes. A reading above 50 indicates expansion, while below 50 signals contraction.
PMI surveys ask purchasing managers about key business conditions including new orders, production, employment, supplier deliveries, and inventories. Because purchasing managers have early visibility into their companies' supply chains, PMI often leads actual economic activity by several months.
Types of PMI Indicators
There are several PMI variants, each providing unique insights into different sectors of the economy.
Manufacturing PMI
- Focus: Factory output, industrial production, and goods-producing sectors
- Components: New orders, production, employment, supplier deliveries, inventories
- Importance: Often considered a barometer of industrial health
- Volatility: Can be affected by seasonal factors and global trade conditions
Services PMI
- Focus: Service sector businesses including finance, healthcare, retail, and hospitality
- Components: Business activity, new orders, employment, prices
- Importance: Services often represent 70-80% of developed economies
- Stability: Generally less volatile than manufacturing PMI
In developed economies, the services sector typically dwarfs manufacturing. Pay attention to both, but recognize that services PMI may better reflect overall economic conditions in consumer-driven economies.
Composite PMI
The composite PMI combines manufacturing and services data, weighted by their contribution to GDP. This provides a comprehensive view of overall private sector activity and is often used as a proxy for GDP growth.
Reading and Interpreting PMI
Understanding how to interpret PMI readings is crucial for making informed trading decisions.
Key Thresholds
- Above 50: Expansion in the sector—economic activity is increasing
- Exactly 50: No change from the previous month
- Below 50: Contraction in the sector—economic activity is decreasing
- Above 55: Strong expansion, typically associated with robust growth
- Below 45: Significant contraction, potentially recessionary
Component Analysis
- New Orders: Most forward-looking component, indicates future demand
- Employment: Reflects hiring decisions and labor market conditions
- Prices Paid: Input cost inflation, can signal future CPI trends
- Supplier Deliveries: Longer times can indicate strong demand or supply issues
Don't just look at the headline number. The new orders component is particularly valuable for anticipating future economic activity, as orders today become production tomorrow.
Trading with PMI Data
PMI releases create significant trading opportunities for forex traders who understand their implications.
Market Impact
- Flash vs Final: Flash readings (preliminary) often move markets more as they provide first look
- Surprise factor: Deviation from expectations drives market moves, not absolute levels
- Cross-country comparison: Relative PMI strength between countries affects currency pairs
- Central bank watch: PMI data influences monetary policy expectations
Trading Strategies
- Track consensus: Know market expectations before the release
- Focus on surprises: Trade the gap between actual and expected readings
- Consider components: Sometimes headline meets expectations but components surprise
- Compare across countries: Use PMI divergences for cross-currency trades
- Combine with technicals: Use PMI as directional bias, technicals for entry
Be aware that PMI from different providers (ISM, S&P Global, national statistics offices) can give conflicting signals. Understand which PMI each country's markets focus on most.
PMI data is released early in the month for the previous month, making it one of the first indicators of economic conditions. This timeliness makes it particularly valuable for position traders looking to anticipate broader economic trends.