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What exactly is a PMI:

  • The Purchasing Managers’ Index (PMI) is a measure of business activity in the manufacturing and service industries.
  • It is a survey-based measure that inquires about changes in respondents’ perceptions of important business variables from the previous month.
  • It is calculated individually for the manufacturing and service sectors before being combined to form a composite index.

How is PMI calculated:

  • A set of qualitative questions are used to calculate the PMI. Executives from a large sample of companies (hundreds) are asked to judge whether key indicators such as output, new orders, business forecasts, and employment were greater than the previous month.

What is the best way to read the PMI:

  • A number greater than 50 indicates that company activity is increasing. Anything less than 50 indicates a contraction.
  • The larger the deviation from the midpoint, the more the expansion or contraction.
  • Comparing the PMI to the previous month’s data can also be used to determine the rate of expansion.
  • If the number is higher than the previous month’s, the economy is growing more quickly.
  • It is expanding at a slower rate if it is lower than the prior month.

What are the economic ramifications:

  • The PMI is normally released at the beginning of each month, well ahead of the majority of official data on industrial output, manufacturing, and GDP growth.
  • As a result, it is regarded as a good leading predictor of economic activity.
  • Economists regard the PMI’s measurement of manufacturing growth as a solid predictor of industrial production, for which official numbers will be issued later.
  • Many countries’ central banks use the index to help them make interest rate decisions.

What does this entail in terms of the financial markets:

  • The PMI is also used to predict corporate earnings and is actively monitored by investors and bond markets.
  • A good reading improves an economy’s appeal in comparison to a competitive economy.

Source The Hindu