What Is the Purchasing Managers Index (PMI)?

What Is the Purchasing Managers Index (PMI)?

A monthly Purchasing Managers Index (PMI) highlighting the manufacturing sector is made available by the Institute for Supply Management (ISM), a nonprofit supply management organization. ISM also tallies a monthly PMI for the service sector and hospitals.

It is a diffusion index that summarizes whether market conditions are expanding, staying the same, or contracting, as viewed by purchasing managers. The purpose of the PMI is to provide information about current and future business conditions to company decision-makers, analysts, and investors.

How the PMI Works

The manufacturing PMI gives equal weight to new orders, production, employment, supplier deliveries, and inventories. The ISM services PMI includes information compiled from non-manufacturers, such as transportation, insurance, construction, and education. A PMI provides insight into the business environment and helps companies see where the economy is headed.

The ISM Report on Business contains PMIs based on surveys. Each PMI is calculated based on responses from senior executives at multiple companies across various industries, which are weighted by their contribution to the U.S. gross domestic product (GDP). The surveys include questions about business conditions, whether or not they are changing, and whether they are improving or deteriorating.

The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, while a reading at 50 indicates no change. The further away from 50, the greater the level of change. 

Who Uses the PMI?

• Corporate managers: May use the monthly PMI results to make key decisions about future business. For example, an automobile manufacturer makes production decisions based on new orders that drive purchasing decisions about parts and raw materials. Existing inventory balances also drive the amount of production the manufacturer needs to complete to fill new orders and to keep some inventory on hand at the end of the month.
• Suppliers: A manufacturer's parts supplier follows the PMI to estimate future demand. The supplier must determine how much inventory its customers have on hand, which affects the production its clients generate.
• Investors: PMI is a leading indicator of economic conditions. The direction of the trend in the PMI may signal changes in the estimates of economic activity and output, such as the GDP, industrial production, and employment.

The Bottom Line

Investors, economists, and analysts have a wealth of information to help them gauge where the economy is trending. One leading indicator is the PMI. Released monthly, a PMI is derived from a survey by the Institute for Supply Management for the manufacturing, services, and healthcare sectors.