One of the most common ways to measure the health of the manufacturing sector is to use the Purchasing Managers Index, also called the PMI. It is a monthly benchmark, used to measure the sentiment of the purchasing managers at 300 leading companies. It is calculated by the Institute of Supply Management (ISM) and can sometimes be referred to as the ISM Index as a result.
How is the PMI calculated?
The PMI is based on a survey which asks questions about key indicators like new orders, inventory levels, deliveries, production and the overall employment environment. It was originally intended to help business leaders evaluate the overall economic situation, but it is now widely followed by economists, stock market analysts and investors.
How to read the Purchasing Managers Index
If the PMI figure is more than 50, it points to an expansion of the manufacturing sector when measured against the previous month. If it is under 50, then companies will likely be planning a contraction. It is an excellent barometer for the health of companies involved in manufacturing as the trend will likely be reflected in smaller companies as well.
Why is the Purchasing Managers Index important for stock markets?
The PMI is used in a number of countries and is a good predictive factor of where profits, and ultimately share prices, will be heading. It can also help trades to glean a better idea of the progress of the global economy.
For example, the Japanese PMI is frequently followed due to the importance of manufacturing within the Japanese economy. In December 2017, Japan reported a gain in its PMI for the fifth month running – this demonstrated that the Japanese manufacturing sector, which also enjoys considerable export share, was in good health in 2H 2017. This could well translate into improved earnings for Japanese manufacturers in Q1 2018.
Can the Purchasing Managers Index be used for sub-sectors?
There is more than just national PMIs out there – IHS Markit, for example, reports PMI for the UK services sector in conjunction with the Chartered Institute of Procurement and Supply. The underlying trends they track are widely followed as a benchmark for the UK economy, which relies more heavily on the services sector. In particular, since the Brexit vote, the PMI is regarded as an objective and important barometer of how the UK economy is really performing.
