PMI Indexes: what they are, how do they work

How do PMI indexes work?

Economic indicators called purchasing managers’ indexes, or PMIs, track the activity of businesses across a range of industries, including manufacturing, services, construction, and retail sales. They are based on monthly surveys that are sent to companies’ purchasing managers—those who are in charge of ordering raw materials, semi-finished goods, and everything else needed for production. These managers have an overview of the economic conditions of the industry in which they operate and their future expectations. As a result, they are projecting indexes and predicting economic trends.

How are PMI indexes calculated?

The three types of survey responses that managers can provide are improvement, no change, or deterioration from the previous month. These scores are used to calculate PMI indexes. Next, the answers are weighed based on five primary categories: inventories, supplier deliveries, employment, production, and new orders. An index between 0 and 100, with 50 serving as the neutral threshold, is the end product. A value above 50 indicates an industry expansion phase, while a value below 50 indicates a contraction phase. There are variations to this general rule of 50, however, so some indexes use a 100 or different base, specified on a case-by-case basis.

What are the types of PMI indexes?

There are different types of PMI indices, depending on the relevant sector and geographic area. Among the most widely followed are:

• The overall PMI, which aggregates data from the manufacturing and services sectors,
• The manufacturing PMI, which focuses on firms producing tangible goods
• The services PMI, which focuses on firms that offer services to consumers or other businesses,.
• The construction PMI, which focuses on firms operating in the construction industry,.
• The retail sales PMI, which focuses on firms that sell goods to end consumers,.

Each sector has specific characteristics and can have a different impact on the overall economy. For this reason, it is useful to analyze individual PMI indices in addition to the overall index. In addition, it is necessary to analyze the impact of individual sectors on the country’s GDP.

As for geographic area, there are PMI indices for different countries and regions of the world. Among the most important ones are:

• The Markit PMI covers about 30 countries and economic areas, including Europe, the United States, China, Japan, and India.
• The ISM PMI, which refers only to the United States and has a time series going back to 1948,.
• The Caixin PMI, which refers to China and takes into account mainly small and medium-sized enterprises,.
• The IFO PMI, which refers to Germany, also takes into account business confidence.
• The HCOB PMI, which refers to France and also takes into account business expectations,.

Why are PMI indexes important?

PMI indexes are important because they provide timely and reliable information on real economic trends and market sentiment. Because they are based on actual business data and not on estimates or forecasts, PMI indexes are able to anticipate economic trends and reflect changes in supply and demand. In addition, because they are published monthly, PMI indexes make it possible to monitor economic developments with high frequency.

Investors use PMI indexes to assess the opportunities and risks of different markets and sectors. For example, a rising PMI index may indicate higher demand for goods and services, higher output, higher employment, and higher profitability for firms. This can support GDP growth, price stability, and consumer confidence. Conversely, a falling PMI index may indicate lower demand for goods and services, lower output, lower employment, and lower business profitability. This can cause an economic recession, deflation, and a loss of consumer confidence.

PMI indexes can also influence the decisions of monetary and fiscal authorities. For example, a high PMI index may push central banks to raise interest rates to contain inflation and cool the economy. Conversely, a low PMI index may push central banks to reduce interest rates to stimulate inflation and boost the economy. Similarly, a high PMI index can push governments to reduce government deficits to maintain debt sustainability. Conversely, a low PMI index may push governments to increase government spending to support aggregate demand.

Beware that these are forecast indices based on the sentiment of managers, so they may be marked by general societal sentiment. They are not exact forecasts, but more feelings.

Also, they are hic et nunc data, which can be contradicted by unexpected or unknown events at the time of the survey.

Sources:

https://www.money.it/Indici-PMI-perche-sono-importanti-Breve-guida-pratica
https://www.ig.com/it/glossario-trading/definizione-indice-pmi
https://www.borsaitaliana.it/notizie/sotto-la-lente/indice-pmi-138.htm