Purchasing Managers’ Index (PMI)

Started in 1948 by the US-based Institute of Supply Management, the Purchasing Managers’ Index, or PMI, has now become one of the most closely watched indicators of business activity across the world.

What is the Purchasing Managers’ Index?

• The Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic trends in manufacturing.
• The PMI is based on a monthly survey of supply chain managers across 19 industries, covering both upstream and downstream activity.
• The value and movements in the PMI and its components can provide useful insight to business decision-makers, market analysts, and investors, and is a leading indicator of overall economic activity in the U.S.

How the Purchasing Managers’ Index Works

• The PMI is compiled and released monthly by the Institute for Supply Management (ISM).
• The PMI is based on a monthly survey sent to senior executives at more than 400 companies in 19 primary industries, which are weighted by their contribution to U.S. GDP.
• The PMI is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment.

• The ISM weighs each of these survey areas equally.
• The surveys include questions about business conditions and any changes, whether it be improving, no changes, or deteriorating.

How to calculate PMI?

The headline PMI is a number which ranges from 0 to 100. If a PMI is above 50, it represents an expansion when compared with the previous month. If the PMI value falls below 50, it indicates a contraction while a PMI value of 50 indicates no change.

The PMI is calculated as:

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

Where:

P1 = percentage of answers reporting an improvement

P2 = percentage of answers reporting no change

P3 = percentage of answers reporting a deterioration

Other companies also produce PMI numbers, including IHS Markit Group, which puts out the PMI for various countries outside the U.S.

Try to Solve 

Q. Consider the following statements:
1. Purchasing Manager’s Index (PMI) is released and compiled by ISM every week.
2. The Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic trends in manufacturing.
3. PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
4. India Manufacturing Purchasing Managers’’ Index (PMI) was at 56.4 in December 2020.

Which of the statements given above are correct?

(a) 1 and 3 only

(b) 2, 3 and 4 only

(c) 2 and 4 only

(d) 1, 2, 3 and 4

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