What is a PMI?
PMI or a Purchasing Managers' Index (PMI) is an indicator of business activity — both in the manufacturing and services sectors. It is a survey based measures that asks respondents about changes in perception of some key business variable from the month before. It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
How is the PMI derived?
The PMI is derived from a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators like output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.
How does one read the PMI?
A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. Higher the difference from the mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing it to the previous month's data. If the figure is higher than the previous month's, then the economy is expanding at a faster rate. If it is lower than the previous year's, it is growing at a lower rate.
What are its implications for the economy?
The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available. So it is considered a good leading indicator of business. Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later. Central banks of many countries also use the index to help make decisions on interest rates.
What does it mean for financial markets?
The PMI acts as an important indicator of economic activities and corporate earnings and is closely watched by investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a-vis another competing economy. For instance, India's manufacturing activity as measured by the PMI expanded to 57.6 5 in July, while for China it dipped for the first time in over a year.
