Purchasing Manager Index (PMI)

Introduction

• Purchasing Manager Index (PMI) was developed by the US-based Institute of Supply Management in 1948. It is one of the mostly used indicators of business activity (both manufacturing and service sectors) across the world.
• It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before. 
• It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

Understanding PMI

• A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. Higher the difference from this mid-point greater the expansion or contraction. 
• The rate of expansion can also be judged by comparing the PMI with that of the previous month data. 
• If the figure is higher than the previous month’s then the econ-omy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.

Important Points

• PMI is considered as a  good and a leading indicator of economic activity as it is usually released at the start of every month, which is much before the publication of the official data.  
• It is also a good indicator of industrial output. 
• Central banks of many countries also use the index to help make decisions on interest rates.
• The PMI also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets.