What are PMIs and what are they telling us

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Added on 23 July 2009 @ 1:28 PM

Background

Purchasing managers' indices, more commonly known as PMIs, are widely-used indicators for the health of manufacturing sectors of various economies (though some countries also have non-manufacturing PMIs). Manufacturing is an important economic sector for most economies, and also a large employer. Generally, the index is constructed out of a number of sub-indices, including: new orders, inventory levels, production, supplier deliveries and the employment environment. The sub-indices themselves are based on the results of surveys conducted among purchasing managers at firms. PMIs are thus good indicators of sentiment and confidence in the real economy. The surveys are typically conducted and the data compiled on a monthly basis. PMI data tends to be released well before actual manufacturing production data, and is thus a more current indicator of the health of the sector. It also has a forward-looking aspect, as questions are asked on anticipated future business condition. For these reasons, it is closely watched by analysts and economists.

In the US, the Institute of Supply Management (ISM) is responsible for compiling the PMI, while in South Africa it is done by the Bureau for Economic Research and sponsored by Kagiso. In the UK and Eurozone it is done by the Chartered Institute of Purchasing and Supply (CIPS/MARKIT). China has two PMI's, one compiled by the China Federation of Logistics and Purchasing (CFLP) and another by CLSA (a securities house). JPMorgan constructs a global PMI based on the various national PMIs.

Interpreting PMIs

The neutral level for the PMI is 50. A reading above 50 means that the manufacturing industry is expanding. A reading below 50 mean that the manufacturing industry is contracting. Rates and direction of change are also important. For instance, a PMI reading might still be above 50, but might be declining month-or month, indicating that the economic cycle is turning.

Currently, in most countries the PMI is still below 50. However, the rate of decline of the PMIs first slowed down and subsequently started rising again. The Eurozone's PMI, for instance, remains below 50, but has increased for four consecutive months and the latest reading (for June) is 42.6. The UK's PMI has also improved to 47 in June from 45.4 in May. China has been the exception. Its PMI has been above 50 for a while now, which is seen as a sign of a ‘green shoots' recovery in that country. Much hope has been pinned on a China-led global recovery, therefore its PMI will be monitored closely for the months to follow.

Fairbairn Capital | Old Mutual

Investment Intelligence|Articles