What is the Manufacturing Purchasing Managers’ Index?
Manufacturing PMI is a leading economic indicator used by economists, analysts, and investors. PMI is an index in the field of manufacturing and services sectors. As the name suggests, it is an index that sums up whether the market conditions are growing or diminishing based on the purchases made by the purchasing managers. It determines how well a manufacturing company is performing over the years. The PMI reports are released by the Institute of Supply Management (ISM) on a monthly basis. Manufacturing PMI is also referred to as the ISM Manufacturing index. PMI value ranges between 0 and 100. A PMI value above 50 implies an expansion of the manufacturing company when compared to the previous month data. And, a PMI value below 50 means contraction of the manufacturing company. Similarly, a value 50 represents no change.
The formula to calculate PMI is given by
Purchasing Managers Index = (P1*1) + (P2*0.5) + (P3*0)
P1 – percentage number of answers which showed a growth
P2 – percentage number of answers which showed no change
P3 – percentage number of answers which showed a decline
Now, let us understand the working of the Purchasing Manufacturing Index. The purchasing managers are those who determine the amount of raw material required and place orders for the same. Since, they are the primary source where the business process initiates, a survey of purchasing managers is done. From this, we can infer that, when the purchasing managers buy more raw materials, it means that there is demand growing in the manufacturing market and therefore, the manufacturing company is usually seen to do well. Contrarily, when the purchasing managers buy less quantity of raw materials, it indicates that there is supply setting up in the manufacturing sector. And hence, the companies do not seem to perform well.
What does the Manufacturing PMI measure?
If it were to be put in one line, the manufacturing PMI to an extent measures the economy of the country. It measures the demand and supply of the companies that fall under the manufacturing sector. This demand and supply tell us about the performance of the company. And, the economy of a country is determined by the performance of all these companies. Hence, ultimately, it determines the economy of the country. Also, note that manufacturing PMI alone does not determine the economy. There are several other aspects that are considered. It also acts as a good predicting indicator as it predicts the GDP and the Bureau of Labor Statistics (BLS) manufacturing reports. As previously mentioned, if the PMI number is greater than 50, then it can be said that the manufacturing sector is expanding and its economy is increasing. If the PMI number is lesser 50, then the manufacturing sector is said to be contracting. The Fed and the Central banks use the Index values to formulate the monetary policy.
A reliable source of information of Manufacturing PMI
Investors require information regarding PMI for making crucial trading decisions. There are web portals that provide reports on manufacturing PMI. The report is based on the following five individual indexes:
New orders (30 percent)
Output (25 percent)
Employment (20 percent)
Suppliers’ Delivery Times (15 Percent)
Stock of Items Purchased (10 percent)
Combining all the data mentioned above, the report is published for users to access. The following links provide info on the present and previous data, previous high and low, short-term and long-term predictions and related news for different countries. It also represents the data graphically for better interpretation.
What do traders care about the Manufacturing PMI and what and its impact on the currency?
Manufacturing PMI is an important leading indicator for traders and investors as it gives hints and clues about the growth in the economy of a nation. And as the economy grows, the demand in the market also increases. Therefore, it helps the traders determine where to put their money in, to guarantee them positive returns. Hence, in general, PMI conclusively determines the future bullishness and bearishness of a country’s currency.
Before directly diving into the impact of manufacturing PMI on currency, let’s understand its components. The components involved in calculating manufacturing PMI include new orders, export, import, inventories, employment, supplier deliveries, production, and price index. As mentioned above, each of the components of Manufacturing PMI has its own weight. The corresponding average of these parameters results in the manufacturing PMI report. Now, when the reports come in, it is observed that the currency might drop even if the reports are good. The reason for this to happen lies in the components of manufacturing PMI. So, the traders examine the reports of all the components in detail and analyze the reason for the jump or drop in the currency. For example, if the manufacturing report shows good numbers due to higher inventories, while a decline in employment and new orders, this would lead the currency to slip.
Frequency of released
The frequency of release of the manufacturing PMI numbers is typically one month for all major countries like the USA, Canada, Great Britain, Japan, the Euro area, Australia, New Zealand, and Switzerland. The reports are released in economic web portals as given above.
The reports of the manufacturing PMI is obtained by the survey of purchasing managers, which is done by the ISM. The manufacturing PMI determines how well a manufacturing company is performing based on the demand for raw material. It basically determines the business conditions in the manufacturing sector. This indicator is found to be very useful for the investors as well, as it a leading indicator and predicts the economic trend in the market.