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All you wanted to know about Purchasing Managers’ Index

KR Srivats | Updated on November 09, 2020 Published on November 09, 2020

PMI has grabbed the headlines for all the good reasons even in these trying Covid times. Of course, the PMI that is being spoken about is not Private Mortgage Insurance or Private Medical Insurance, but the much-followed Purchasing Managers’ Index.

With India’s PMI for manufacturing, at 58.9 in October, recording the strongest growth in 13 years, and that for services expanding for the first time in eight months, there is a spring in policymakers’ step. They’d like to point out that their fiscal and monetary responses for Covid times are yielding results and the economy is normalising at a faster pace than expected.

What is PMI?

It is an economic indicator that is calculated from monthly surveys of purchasing managers and supply executives from specific companies. PMI Manufacturing gives an indication of the economic health of the manufacturing sector. The most followed PMI readings come from Markit and Institute of Supply Management. To arrive at PMI, a questionnaire seeking factual information on variables such as new orders, output, employment, supplier deliveries, inventories, new export orders and prices are sent to purchasing managers of business enterprises and they are asked if these factors are above or below the level of the previous month. It is calculated separately for the manufacturing and services sectors and then a composite index too is constructed.

So how does one read the PMI? A figure above 50 denotes an expansion while anything below 50 denotes a contraction in activity. The higher the difference from this mid-point of 50, greater the expansion or contraction.

Also, the rate of expansion can be judged by comparing the PMI with that of the previous month reading. If the latest figure is higher than previous month’s, then manufacturing or services is expanding at a faster rate. If it is lower than previous month, then it is growing at lower rate.

Why is it important?

The PMI is becoming one of the most tracked indicators of business activity across the world. It provides a reliable expectation of how an economy is doing as a whole — and manufacturing in particular.

It is a good gauge of boom and bust cycles in the economy and closely watched by investors, business, traders and financial professionals besides economists. Also, the PMI, which is usually released at the start of the month, serves as a leading indicator of economic activity. It comes before the official data on industrial output, core sector manufacturing and GDP growth.

Even central banks use the PMI to take decisions on interest rates. Besides influencing equity market movements, PMI releases also impact bond and currency markets. Since manufacturing sector is often where recessions begin and end, PMI manufacturing is always closely watched. A good reading of PMI enhances the attractiveness of an economy vis-a-vis other competing economies. Suppliers can decide on prices depending on PMI movements.

Why should I care?

You should care about the PMI if you need a signal on where the economy is headed. If you are a job seeker, it will provide a signal on whether employment opportunities have increased or decreased. If you are an investor, you can gauge as to how changes in macro fundamentals of the economy could impact sentiments in the equity market. If you are a business owner, it could help you take right decisions on sourcing of raw materials, inventory level that need to be maintained, etc.

The bottomline

If you’re a business owner, manager, investor or professional trader, ignore the monthly PMI at your own peril.

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Published on November 09, 2020
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