It would be nice to have a crystal ball that could tell you whether the economy is about to enter a period of healthy growth or has ailments that will soon cause it to stumble. To be clear, that crystal ball does not exist.  

But there is no lack of economic data that can be used to gauge the health and prospects of the overall economy and individual sectors. For example, economists, small business owners, investors and others closely watch the release of the Bureau of Labor Statistics’ (BLS) monthly survey of employment and wage growth.[1] More recently, many observers have pored over data about inflation for hints about future interest rate changes and the trajectory of the economy. Other closely watched economic indicators include measures of consumer confidence, new home starts, rental prices trends, and the volume of goods being shipped.

The Purchasing Managers’ Index (PMI) is a less well-known but unique measure of economic health. While other measures, like employment data, provide a view of the economy based on the past, the PMI delivers a future-looking perspective on economic trends. The PMI is a valuable tool for policymakers, regulators, executives, and investors to make more informed decisions because it is forward-looking and uniquely formulated.  

 How Is the PMI Calculated?

To get an on-the-ground measure of where the economy is headed, it makes sense to learn from people who place orders for new goods and services. That is the basic idea behind the PMI, which is based on monthly surveys of purchasing managers in a wide variety of industries. Originally focused only on manufacturing, the PMI has since expanded to include the services industry as well as separate PMIs for the global economy and local economies, like Chicago.[2]

Both market research firm S&P Global and the Institute for Supply Management (ISM) release monthly PMIs.[3] The organizations develop their PMIs by asking purchasing managers about several business-critical topics. For example, the S&P Global PMI asks respondents for information about:   

  • The volume of new orders
  • Business output
  • Employment
  • Supplier delivery times
  • Inventory of purchased goods

Survey respondents are asked to report whether they see an improvement, deterioration, or no change in each of the categories. The data is then weighted depending on the category’s contribution to the gross domestic product (GDP). For example, new orders are an especially important indicator of economic activity and represent 30% of the PMI score while responses about inventories account for 10% of the PMI.

When it’s reported, the collected and analyzed survey data is communicated as an overall score. Scores above 50 represent a business expansion compared to the previous month; below 50, a contraction. A score of 50 indicates no change. For example, S&P’s global composite PMI – meaning it represents manufacturing and services around the globe – was 50.5 in September.[4]  

How PMI results are used  

The PMI is both an indicator of economic conditions and a tool to help guide decisions. Economic analysts and commentators will often include PMI results in their assessment of where the economy is headed.  

But the PMI is also used for more tangible purposes. For example, small business owners can use the information to make decisions about the need to hire new employees or invest in new equipment if demand is rising. Supply chain companies, including many small firms, can also get a perspective on whether demand for their parts is increasing, decreasing, or staying the same – information that can help support hiring and investment strategies.  

The PMI is also used as an influencing tool by institutional and individual investors. As a leading indicator, investors can identify meaningful trends before indicators like GDP, employment, and industrial production reflect them.    

Regardless of the purpose, it’s always good to remember that decisions are best guided by multiple data points. The PMI provides a unique perspective on the economy, but it’s only one of multiple resources that investors, business owners, and policymakers should utilize to inform their choices.

 

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