The Purchasing Managers Index (or PMI) is composed of
five sub-indexes of surveys involving over 400 purchasing managers
in the whole country. These purchasing managers are selected based
on their geographic and industry diversity. The five sub-indexes
and their respective weighing are as follows:
- production level - 0.25
- new orders - 0.30
- supplies deliveries - 0.15
- inventories - 0.10
- employment level - 0.20
Purchasing Managers Index - Economic Indicator Of
Increased Gross Domestic Product, Otherwise Recession
The purchasing managers can only answer the survey
questions with 'better', 'same' or 'worse'. The Purchasing Managers
Index is determined by taking the percentage of the respondents who
answered 'better' - and adding to that half of the number of
respondents who pointed to no change in conditions.
A PMI of 50 and up means that better economic times
are just ahead for the country. This number (and everything above
it) points to the expansion of the industry - and by extension, the
possibility of increasing the country's Gross Domestic Product.
When the Purchasing Managers Index falls below 42 though, a
recession may very well take place in the future.
As with other economic reports, the change in results
should be perceived according to what the previous result was. For
example, a current PMI of 52 from a previous 57 is not good, at
all.
This economic indicator is followed closely by
investors and economists because it is one of the tools that can
set the whole tone of the future economic conditions of the
country. Some of the subjective answers from respondents could also
shed more light on investors - as to what manufacturing trends may
be developing, or what the overall manufacturing condition in the
country is like. Purchasing Managers Index is also very timely,
which makes it an effective instrument through which an investor or
an economist can use to predict future trends and economic
series.