The Importance of PMI
There are hundreds of indicators and analytical instruments to measure the economic state at any point in the history, but most of them rely on past or historical data, but the PMIs or the ‘Purchasing Managers’ Index offers a future projection of the economic performance making it one of the investor most read indicator.
What Is PMIs?
The purchasing managers’ index PMIs is an economic indicator, which is built by surveying several tops purchasing managers at different businesses that compose one economic sector. The PMIs is divided by sector to appraise better the economic projection. The manufacturing and the services sectors are the most reliable and important PMIs. Investors use the PMis surveys to get a clear picture of the country or region economic health. This indicator is released monthly making it the most research economic indicator.
Understanding the PMIs
The Purchasing Manager Index consist on serval surveys done to managers, in which each answer given is assigned a numerical value, which is compiled and calculated into a single report. The final numerical value will anticipate the current or next month sector behavior, and once it is normalized, it reflects the country economic situation for the period.
Most common surveys answers numerical valueare multiplied by 1 if there is improvement 0.5 if there is no change and O if there is deterioration or worsening of the evaluated item.
A value equal or greater than 50 is considered positive, and it suggests improvement and economic growth.
A value lower than 42 is considered negative, and it is interpreted as economic deterioration, and it can signal an economic recession.
The PMIs report is divided into two main sectors:
- The manufacturing sector, which reflects the general economic and its international situation since it is highly dependent on exportation and importations.
- The Service sector reflects better the domestic situation because it is more sensitivity for it.
PMIs gives an insight into gross sales, employment rate, inventories size, and pricing.
Purchasing Manager Index PMIs in Use
PMIs deliver the information needed for manufacturers to increase or decrease its production to satisfy the goods expected demand.
The amount of inventory needed to fulfill the current and immediate future demand, if the demand for a good will substantially increase the manufacturer will need to buy more components, raw materials, or parts to produce those goods.
Employment suppliers and manufacturer would hire more or fire some worker to adjust the company labor force to its needs.
Businesses, as well as consumers confidence, are reported, it is positively correlated with an increase in spending and economic growth.
Price stabilization or inflation may be inferred from the PMIs
Investor will be cautious each time the PMI is lower than 50 and they won’t invest when it is lower than 42.