What is the Purchasing Managers Index – PMI in Economics?
What is the Purchasing Managers Index – PMI in Economics?
PMI in economics helps to show the expansion or contraction of a particular industry such as construction, services, and manufacturing. So, PMI is very important to measure the business of a particular industry and the economic performance of the overall economy.
What do PMI numbers mean?
The score value of the PMI can range from 0 to 100. According to Koenig, we can accept when the score value of the PMI is equal or more than 50. So, the PMI index uses 50 as it’s the base value.
Business firms can measure and forecast the future performance of the industries based on the PMI score value as follows.
- When the PMI value is above 50, it shows the expansion of the industry. The output level of the industry will increase.
- When the PMI value is below 50, it shows the contraction of the industry. The output level of the industry will be decreasing.
- When PMI value is exactly 50, there is a balance between contraction and expansion of the industry. Output level is at a constant level.
Figure 1 graphically presents this scenario more clearly.
Source: Joubert, n.d
But in some industries these values can differ. As an example, PMI values above 47 generally signal expansion in manufacturing (Koenig, 2002).
Role of PMI in Economy
Using the PMI value, we can measure the overall performance of the economy. Using the PMI figures, we can evaluate the long-run economic indicators such as GDP growth rate, inflation growth rate, interest rate, and employment rate.
Tsuchiya in 2012 conducted a study to find the Purchasing Managers’ Index usefulness for assessing the Economy’s Strength. According to the findings of the particular study, PMI can forecast the acceleration or deceleration of industrial production (IP) and gross domestic product (GDP). Banerjee et al., 1998 also tested the relationship between PMI, inflation and GDP growth in the US. According to their findings, there is a significant relationship between indicators
According to Koenig, 2002, when PMI is around 40, GDP growth of an economy can turn to positive. Further, he mentioned that when PMI value is above 52.5, there short-term interest rates will raise.
In the early stages of the 2009 financial market collapse and Covid 19 pandemic in 2020, PMI values contracted. These are the real-world examples that PMI correctly forecast the economic situations.
What is difference between GDP, CPI and PMI?
How to calculate the economic indicator ?
| Gross Domestic Product (GDP) | Purchasing Managers Index | Consumer Price Index |
| Gross Domestic Product (GDP) is the most important and most popular macroeconomic indicator to measure the overall health of the economy. Usually GDP shows the value of the final goods and services produced within an economy. GDP can be measured by aggregating the values of its four components (private consumption, private investment, government expenditure and net exports) | PMI in economics consists of five separate indexes. They are employment, measuring monthly changes in manufacturing output, inventories, new orders, and vendor deliveries. These separate indexes are combined and created a composite index which is a weighted average of the separate indicators (Harris, 1991). | CPI explains how is the continuous and sustained escalation in price levels of goods and services in an economy (Meyer & Habanabakize, 2018). CPI is really helpful to get the cost of living of the consumers in a country. CPI is measured by calculating the changes of the prices of a baskets of goods relative to the based year. |
When calculate the economic indicator?
| Gross Domestic Product (GDP) | Purchasing Managers Index | Consumer Price Index |
| As an economic indicator, GDP is calculated for every three months and every year. So, this is a limitation when business parties take timely decisions. | PMI is calculated monthly wise (Koenig, 2002) | CPI is calculated monthly, quarterly or yearly. |
Who calculates the economic indicator?
| Gross Domestic Product (GDP) | Purchasing Managers Index | Consumer Price Index |
| The National Statistical Office of a country calculates the GDP. As examples GDP of the UK is calculated by The Office for National Statistics (ONS). | The government does not calculate the PMI. PMI is calculated by a private business intelligence organization in the country. As an example, in the USA, Institute for Supply Management (ISM) calculates the PMI. Institute for Supply Management forward questionnaires for the purchasing and supply executives in manufacturing firms over the country based on the business conditions. Then based on the responses of the firms, PMI is calculated (Koenig, 2002). | The National Statistical Office of a country calculates the CPI (OECD, n.d.). As examples in USA, CPI is calculated by the The Bureau of Labor Statistics (BLS). |
Relationship between the PMI in economics and other economic indicators
| Gross Domestic Product (GDP) | Purchasing Managers Index | Consumer Price Index |
| Since GDP is calculated for every three months, other economic indicators such as PMI, CPI are more frequently used by business organizations. | One of the reasons for the PMI to be considered as a major economic indicator that has the strong relationship with the GDP and that is generated by monthly. PMI mostly relate with the investment component of the GDP. | The consumer price index is mostly related to inflation. Inflation can be considered as a key indicator for economists and financial analysts since inflation can impact the performance of companies. To calculate inflation, the consumer price index is used. |
References
Harris, E. (1991). Tracking the Economy with the Purchasing Managers’ Index. https://fraser.stlouisfed.org/files/docs/publications/frbnyreview/pages/1990-1994/67162_1990-1994.pdf
Joubert, T. (n.d.). What is the PMI, and why is it important for traders? IG. Retrieved August 9, 2022, from https://www.ig.com/ae/trading-strategies/what-is-the-pmi–and-why-is-it-important-for-traders–210706
Koenig, E. (2002). Using the Purchasing Managers’ Index to Assess the Economy’s Strength and the Likely Direction of Monetary Policy. In core.ac.uk. Federal Reserve Bank of Dallas; Federal Reserve Bank of Dallas. https://core.ac.uk/download/pdf/6971097.pdf
Meyer, D. F., & Habanabakize, T. (2018). Analysis of Relationships and Causality between Consumer Price Index (CPI), the Producer Price Index (PPI) and Purchasing Managerâ€TMs Index (PMI) in South Africa. Journal of Economics and Behavioral Studies, 10(6(J)), 25–32. https://doi.org/10.22610/jebs.v10i6(j).2590
One Comment