What is the Purchasing Managers Index, or PMI?

Each month, multiple groups release Purchasing Managers' Indexes, or PMIs, for specific regions around the globe. The indexes are valuable indicators of the strength and direction of the overall economy and the manufacturing industry. As such, they are used heavily in business planning, banking, industry analysis and investment planning.

Each Purchasing Managers' Index is calculated from a monthly survey of manufacturing industry professionals in the private sector. They survey covers topics like new orders, manufacturing output, employment, prices and inventory. Using the information from survey respondents, a specific index reading is calculated. A reading above 50 on the index indicates that the industry is growing; a reading below 50 indicates that it is shrinking.

Two main groups produce a Purchasing Managers' Index each month. The Institute for Supply Management's monthly PMI covers companies in the United States. The Markit Group produces PMIs for more than 30 countries around the world. Because PMIs are released every month, it's easier for analysts and industry professionals to track patterns and overarching trends in the performance of the sector.

The monthly survey asks respondents to report solely on month-over-month changes. It is sent out at the beginning of each month to carefully selected businesses in the manufacturing industry of the target region. Many recipients wait until the end of the month to fill in their surveys in order to give the most accurate information for the month. When all of the surveys are returned, ISM or Markit Group analysts compile the responses and calculate an index reading accordingly. For the ISM Purchasing Managers Index, equal weight is given to new orders, production, employment, supplier deliveries and inventories.

Each Purchasing Managers' Index is useful to a variety of audiences. The index makes it easy to spot trends in demand and new orders. With that information, business owners can determine the best times to buy new equipment, hire more employees or open new offices. When the index is consistently low, manufacturing professionals might make more conservative choices. Policymakers and economic forecasters use the information to make more accurate predictions about future performance. In addition, the Markit Group states that the index helps central banks set interest rates. The information may also be used by investors looking to pour money into manufacturing businesses.

Although the PMI is a valuable tool, it is just one of many indicators that industry professionals use to make business and financial decisions. In combination with other indexes, personal experience and less frequent industry reports, the PMI helps round out an analysis of domestic and global manufacturing.

For manufacturing professionals, the Purchasing Managers' Index is a crucial economic indicator. By following the latest information and paying attention to trends, you can make better, safer business decisions.

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