Purchasing Managers Index
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The PMI is a composite index that is based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries.
A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting.
The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely.
Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
Strengths
Extremely timely, data is one day old.
The PMI is often used to help predict the Producer Price Index which is released later in the month.
By many it is considered to be the best snapshot of the factory sector.
Weaknesses
The survey gives three possible responses - fast, same, slower. Therefore results are not that specific.
The index leaves out employment costs, which are a large portion of manufacturing costs.