The Purchasing Manager Index (PMI) assesses the business conditions of the manufacturing and service sectors of a country.
The PMI is used to measure the change in the spending of business firms.
About 500 purchasing managers are asked to grade the relative level of business conditions regarding employment, level of inventory and new orders, state of production, and supplier deliveries.
A reading above 50 indicates growth in the sector. Conversely, a reading below 50 points to a contraction.
What is PMI?
The PMI is a composite index that is based on five major indicators:
- New orders
- Inventory levels
- Production
- Supplier deliveries
- 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.
Why is PMI important?
The PMI report is an extremely important indicator of 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.
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 the market.
One closely watched part of the report is growth in new orders, which predicts manufacturing activity in future months.
How does PMI affect a country’s currency?
Generally, a higher PMI reading (above 50) is viewed as positive for the economy, potentially leading to a strengthening of a country’s currency. This is because it suggests confidence in the service sector, which contributes significantly to GDP.
However, the magnitude and duration of the impact depend on several factors:
- Magnitude of the change: A slight increase above 50 might have a smaller impact than a significant jump in the reading.
- Market expectations: If the reading aligns with or slightly exceeds expectations, the reaction might be muted.
- Comparison to past readings: A sustained upward trend in the PMI is more likely to boost a country’s currency than a single positive reading.
- Overall economic context: If other economic indicators like manufacturing PMI or inflation are weak, the positive effect of a strong services PMI might be tempered.
Therefore, while a strong PMI tends to be associated with a stronger currency, the actual impact is nuanced and context-dependent.
Additionally, unforeseen events or global market sentiment can further influence the currency’s movements.
To make informed predictions, consider analyzing the:
- Historical impact of past PMI readings on the currency, taking into account the prevailing economic climate at the time.
- Market expectations and analyst forecasts for the PMI and upcoming economic data.
- The overall outlook for the economy and potential risks or opportunities.