Why are manufacturing and services PMIs important market movers? Here’s a quick guide to what they mean and how to read them.
PMIs are economic indicators that are closely followed and published monthly on the macro data calendar in both the preliminary and final versions: what are they for and why are they so important for photographing the state of health of the economy of the main nations of the world?
To answer these questions, we must first focus on the description of these indices, explaining what PMIs are and what news they offer on the production and economic performance of the individual countries under investigation and of the economy in general.
In 2024, for example, these market movers were under the spotlight of investors, analysts and politicians looking for concrete clues on the solidity of the economic recovery in a global context hit by wars, tariff threats, and uncertain maneuvers by central banks.
Every time a PMI index is published regarding economic powers such as the USA, China, the European Union, the financial markets are affected, with the stock markets moving up or down based on the results.
Considering the importance of these indicators, below is a guide on what they are, what they are used for and why PMI indices are important.
What are PMI indices
PMI index stands for Purchasing Managers’ Index, that is index of purchasing managers. It is the result of surveys conducted on a sample of companies (over 300) in which the interviewees are precisely those responsible for the purchasing sector.
Managers are asked to answer questions about different aspects of business performance that, taken together, can provide a picture of the economy of a country (for example, indicating an expansion of production or a decline or stagnation).
To provide a concise definition, it can be said that:
The PMI index was designed to provide a single instantaneous data of the basic economic conditions. There are four types: manufacturing, services, construction and composite.
Each of them is the result of the weighted average of the indices relating to new orders, production, employment, supplier delivery times and inventory levels.
Each month, surveys collected by international bodies are proposed. The answers can be of three types: improvement, worsening, no change. Through these answers it is possible to build a picture of the economic situation of the country.
PMI indices: what do they measure and how to read them?
Each PMI index can take on a value between 0.0 and 100.0: if all the answers indicate improvement, then the index will tend towards 100.0.
This means that, when the indicator is above 50.0, most of the company reports have indicated an improvement in conditions, therefore we can speak of expansion of the sector. On the contrary, below the 50.0 line the sector is said to be in contraction.
What are the PMI indices?
As already mentioned, there are four types of PMI indices:
- Composite PMI, which brings together data from the manufacturing and services sectors and therefore offers a complete economic view;
- Manufacturing PMI, which concerns companies producing material goods;
- PMI services, relating to companies that offer services to consumers or other businesses;
- PMI construction, which deals with companies that operate in the construction sector
Each of the types listed offers updated results in two versions: Flash and Final, published one week apart.
Generally, the Flash version - the first to be released - indicates a sort of anticipation and, therefore, is the most impactful on the markets.
Who publishes the PMI Indices
There are various institutions that release the PMI indices of the various countries, some recognized at governmental level, others independent.
Sometimes, these indicators are released by two different bodies for the same country; the results can therefore be divergent, but they certainly offer an even more comprehensive picture of the economic situation of a nation.
For example, in China, in addition to the official PMI index, there is also the HSBC PMI (HongKong and Shanghai Banking Cooperation) index.
As for the surveys of other countries, the Institute for Supply Management (ISM) offers the publication of the United States, but the measure developed by S&P Global is also taken into consideration.
In Europe, the PMI indices are updated by HCOB (formerly S&P Global), while for the Chinese economy, the official reference is Caixin.
Why are PMI indices important?
PMI indices are considered very important indicators, because they reveal the performance of the driver sectors of a country’s economy, from the perspective of companies and, therefore, are qualified as a faithful snapshot of the general economic picture.
Furthermore, since they are based on concrete data relating to the production activity of a company, they offer a fairly realistic picture of the economic state of a country. Furthermore, the fact that they are concentrated on manufacturing and services allows for a complete view of the sectors that are crucial for a nation.
Finally, their monthly release represents a truly important aspect for having constant feedback over time.
It should be noted, of course, that it is above all the composite indices that are most relevant since they aggregate both key sectors of a country’s economy.
Original article published on Money.it. Original title: Indici PMI, cosa sono, a cosa servono e perché sono importanti
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