Finance · 14 July 2021

What does PMI stand for in finance?

What does PMI stand for in finance?

Finance, like most complex industries, has a robust use of acronyms and abstruse phrases, which are intense summaries of sophisticated tools, mechanisms, or behaviours.

An important tool used in finance and economics is an economic indicator, of which there are many. A metric used to measure and evaluate, for example, the health of the macroeconomy. These metrics, or indicators, are collated by government departments and by private intelligence organisations.

Economies are a source of risk, affecting the growth or decline of all industries and companies within them. Indicators are therefore essential tools for financial analysts and investors to use for tracking macroeconomics.

One of those acronyms is PMI which means ‘a purchasing managers index’. It is a beneficial indicator for measuring the robustness of a particular sector within a specific economy. This is not to be confused with the other economic indicator, GDP.

What is a GDP?

The leading indicator of an economy’s health is traditionally the Gross Domestic Product (GDP). It gives a picture of the entire economy, and the changes reported quarterly show the health of that whole economy.

It includes the collation of data on consumption, investment, government expenditure, and net exports. The Kingdom of Bhutan does not use the GDP indicator as a macroeconomics tool. They use the Gross National Happiness index.

GDP is often criticised as an imperfect quantifier of an economy as it is affected by political definition (opinion). This was shown in a classic example from the Italian Government when the EU ruled that its members must maintain a deficit within 3% of its GDP. Italy produced an estimated value of their black market economy and collated it into its GDP calculations. This gave an unquantified boost to their economy of 1.3%, and they used this to obtain more budgetary spend latitude.

The other factor that some role players consider to be a disadvantage of GDP is its quarterly release as an economic indicator. More frequent releases are preferred for more agile economic decisions.

What is a PMI?

The number, which is a percentage, is achieved by executing monthly surveys across different companies, e.g. The IHS Markit/BME PMI for the German Manufacturing industries moved up in June this year to 65.1. There are two main PMIs, namely, Manufacturing and Services, but you can also get reports on Construction PMIs or combined data for Country PMIs.

By watching the month-on-month movement of the percentages, you will get an indication of the economic trends in both the manufacturing and services sector. This helps purchasing managers, for example, work out if conditions are ripe for buying by noting if the industry is expanding, stagnant, or contracting. Using this information and their experience with other research, they will gain insights to form a prediction for this market.

These indicators are closely watched and, at a macro level, feed into the economic health assessment of a country.

How is the PMI worked out?

As PMIs are data-driven, the first step is to get data from relevant market participants. A massive outreach project is run, distributing fact-based questions to hundreds of role players in the concerned sector. In the project to achieve a manufacturing PMI, the questionnaire would only be sent to manufacturing companies.

The questionnaires asked factual questions, avoiding the ability of participants to submit opinions or hypotheses. The questions will be structured around five key weighted variables, which are stock of items purchased (10%), suppliers’ delivery times (15%), employment (20%), output (25%), and new orders (30%). These surveys will be resent on a monthly basis.

Expansion of business activity is indicated if a number higher than 50 is achieved, and contraction is indicated by a number below 50. The month-on-month comparison also informs this conclusion. Whilst the main PMI (the headline number) gives the overall indicator; some sub-indices are very useful for the market role players, e.g. exports, inflation, capacity utilisation, GDP, inventories and employment.

Where are PMIs from?

The use of PMIs can be traced back to 1948 in the USA, with the Institute for Supply Management (ISM) first publishing it. In Singapore, the PMI is produced by the Singapore Institute of Purchasing and Materials Management (SIPMM), while IHS Markit produces various PMIs for over 40 countries.

The PMI for a country is usually released before a GDP index is published. It gives a very good indication of where a country’s economy is headed but is not solely used by economists. Manufacturers and suppliers will use the Manufacturing PMI dataset to inform production projections, and their investors will use the PMI to buy or sell stock shares.

PMIs are believed to give a better snapshot, due to timing, of a market’s health versus the quarterly production of the GDP figures. Both do, however, have a role to play in the analysis of the market and investment decisions.

How helpful is a PMI report?

PMI reports contain current and insightful information, comparisons (stats), and helpful graphs.  Here is an extract from an example report to show what information you could expect from a current German Manufacturing PMI report, using actual, current data.

The report summary would show an overall performance, which for this sector, moved up to 65.1 in June of 2021. It started the year at 64.9, hit a record high in March of 66.6, and closed at 65.1. In our article above, we mentioned that figures above 50 indicate growth in the market, so these figures are showing good growth.

The current PMI data also shows that for the first time in 3 months, production and new order growth sped up, but production is still greatly affected by supply shortages. The latter would indicate a backlog of work will be building up. Projections indicate an upcoming sharp, fast rise in factory employment.

Statistically, Germany’s Manufacturing PMI had an average of 51.87 points over the 13 years from 2008 to 2021. The record low was in January 2009, which was 32 points, and the record high was 66.6 in March 2021.

PMI data is always current and quickly shows market changes, therefore, making PMI’s a strong contender for the global leading economic indicator versus the traditional GDP indicator.market

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