Purchasing Managers Index - PMI

The Purchasing Managers Index (PMI) is an index measuring the economic "health" of the manufacturing industry. PMI is based on five key component metrics: new orders, inventory levels, production, supplier delivery, and the working environment. PMI's purpose is to provide information on current business conditions to policymakers, analysts, and purchasing managers of companies/groups.

Data to compose PMI reports is collected using monthly surveys submitted to purchasing executives at approximately 300 companies. PMI above 50 corresponds to the expansion of production activities compared to the previous month. A PMI below 50 indicates a slowdown, and an index just below 50 means no change. The Institute of Supply Management (The Institute of Supply Management) publishes the PMI index each month. Although the ISM also publishes a number of other indicators, the PMI is the most widely adopted data and it is sometimes referred to as the ISM index.
How does PMI influence the decisions of corporate purchasing managers?

PMI is an important decision-making tool for managers in a variety of roles. For example, an auto manufacturer makes production decisions based on new orders they expect from customers in the coming months. The new orders will drive the management's purchasing decisions in terms of quantities of parts and raw materials, such as steel and plastic. The current inventory balance also helps companies predict how much production a producer will need to complete in order to complete the new order and keep some inventory by the end of the month.

Vendors also make decisions based on PMI. A manufacturer's parts supplier relies on PMI to estimate future demand for its products. If a manufacturer's new orders are expanding, for example, they may raise customer prices and accept a price increase from its suppliers. On the other hand, when new orders fall, manufacturers may have to lower selling prices and demand lower costs for purchased parts.

A company uses all of this PMI information to plan its annual budget, employee count, and cash flow forecast.

PMI's role in imports and exports

The PMI also provides information on imports and exports, which are important statistics for businesses operating abroad. Suppose, for example, that an automobile manufacturer buys steel in the United States and from China. If imports are on the rise, that trend will have a negative impact on US companies selling the same product. On the other hand, if parts manufacturers' exports increase, a component supplier may ask for higher prices from the US company when it comes to buying their products.

PMI in determining the national economy situation

The PMI index shows a fairly general economic situation in both manufacturing and services. Therefore, this can be seen as an important measure of the level of economic development, especially when considering the manufacturing sector. PMI shows the level of “excitement” of purchases in the manufacturing sector for a month and the changes over the month will clearly reflect the growth/weakening of the service and manufacturing sector. At the same time, it also allows Traders to evaluate the potential of other indicators such as consumer price CPI, gross domestic product GDP ... and help us gradually know where the US economy is. , as expected by policymakers.

PMI is one of the top “economic indicators to be watched by traders” and every month at the time of the PMI release of one of the major currencies, the market will fluctuate strongly. this can minimize risks and seize trading opportunities from the PMI indicator.