Purchasing Managers' Index
What is Purchasing Managers' Index?
Purchasing Managers' Index readings come from monthly surveys of supply managers, where a value above 50 means expansion and below 50 means contraction.
Purchasing Managers' Index surveys ask supply managers at hundreds of firms whether new orders, output, employment, supplier delivery times and inventories are better, the same, or worse than the previous month. Each question becomes a diffusion index, and the headline PMI averages those components. The dividing line is 50: above 50, more respondents report improvement than deterioration, so the sector is expanding, and below 50 it is contracting. Distance from 50 measures how widespread the change is, not how large it is, so a reading of 55 says growth is broad, not that output grew 5 percent. In the United States the Institute for Supply Management publishes manufacturing and services versions, and S&P Global produces comparable indexes for many countries, which makes PMI one of the earliest cross-country reads on the cycle each month.
Purchasing Managers' Index: a worked example
Suppose 40 percent of purchasing managers say new orders improved, 45 percent say they were unchanged, and 15 percent say they fell. The diffusion index is 40 + (0.5 × 45) = 62.5, well above 50, so new orders are expanding. If the same survey put output at 51.0, employment at 48.0, supplier deliveries at 52.0 and inventories at 49.0, an equal-weighted headline is (62.5 + 51.0 + 48.0 + 52.0 + 49.0) ÷ 5 = 52.5. The sector is growing on balance even though employment sits below 50, which is why the components get read next to the headline.
The mistake students make with purchasing managers' index
The frequent error is reading a fall from 57 to 53 as the economy shrinking. Anything above 50 still means expansion, so the sector grew, just less broadly than the month before. The mirror error is treating 50 as a growth rate. It is a threshold between more firms improving and more firms deteriorating, so a PMI of 50 means expansion has stalled, not that output is zero.
Purchasing Managers' Index questions
What does a PMI above 50 mean?
A PMI above 50 means more surveyed firms report improving conditions than deteriorating ones, which is read as expansion in that sector. Below 50 means the reverse, and exactly 50 means no change on balance. The 50 line is fixed by how a diffusion index is constructed, so it never shifts.
Is PMI a leading indicator?
PMI is treated as a leading indicator because new orders and hiring plans are reported before the resulting production reaches official output data. It also arrives near the start of the month, ahead of most government releases. That timing is a large part of why markets watch it.
What is the difference between manufacturing and services PMI?
They survey different sectors: the manufacturing PMI covers goods producers, while the services PMI covers the far larger share of employment and spending in a developed economy. The two can move in opposite directions, and manufacturing tends to swing more. Reading only the manufacturing index overstates how volatile the whole economy is.
Formula / Example
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