The Purchasing Managers’ Index (PMI) is one of many important macroeconomic indicators investors and Wall Street analysts look to each month for clues on where the economy will head next. It’s what is known as a diffusion index – a gauge that summarizes several variables – of the manufacturing and services sides of the business world. 

There are PMI readings for the US as well as regions and countries abroad. What’s more, there isn’t just a single PMI set since more than one entity gathers and reports PMI data. Key for market-watchers, though, is that PMI levels above 50 indicate economic expansion while sub-50 readings suggest contraction.

Calculating the PMI Index

The whole point of PMI data is for policymakers, analysts, and even everyday investors to have a better feel for what the economic landscape might look like weeks or months down the road. Prevailing economic trends can only be pinpointed through precise calculations, however, and PMI data provide just broad insights. Both the Institute of Supply Management (ISM) and S&P Global report PMIs, and the general calculation is rather straightforward:

The PMI formula is: 

Index Value = (% ‘up’) + (0.5 * (% ‘the same’)) + (0.0 * (% reporting ‘down’))

The upshot is that if more individual company respondents report improving business conditions, then the overall PMI level should be north of 50, suggesting growth in that segment of the economy. The PMI is what is known as ‘soft’ economic data – in that it simply assesses selected companies' feelings about private-sector economic activity. 

It’s not unusual for the calculated PMI level to be under 50 while ‘hard’ data (such as monthly employment reports, Industrial Production, retail sales figures, and the Consumer Price Index (CPI)) point to strength in the underlying economy.

Parsing the PMI and How It Works

What’s helpful about PMI data sets is that they are like a treasure trove of business indicators for news junkies and finance nerds alike to delve into. The figures are also considered to be among the most reliable leading economic indicators, as opposed to more backward-looking job growth reports and inflation trends. Hence, the Federal Reserve and the major Wall Street bank strategists all anxiously await each month’s PMI reports. 

Manufacturing & Services PMI

When the numbers are released, you will find that there are two broad categories: manufacturing and services. Comparing the two values helps analysts determine which part of the economy is faring relatively better. Of course, US GDP is about 70% services-based, but much of the stock market is actually more dependent on a healthy manufacturing sector. So, either way you look at it, both categories are critical. 

ISM’s PMI

All PMIs are survey-based, meaning the two entities simply ask executives at companies big and small for their feelings on where things stand in their business niche. The ISM’s monthly survey is among the first pivotal economic barometers released each month, with the Manufacturing report usually hitting the tape on the first business day of the new month while the ISM Services data comes out a business day or two thereafter. 

S&P Global’s PMI

S&P Global, partnering with IHS Markit, issues its “Flash” PMI reports for various countries early in the month, but then publishes a “Final” PMI dataset approximately one week later. S&P Global states that its country-based PMI data are released on standard schedules with Manufacturing PMI coming out on the first working day of the month, Services PMI on the third working day, and Whole Economy PMI also on the third working day. Finally, there are regional PMI data sets within the US, such as the Chicago PMI, Philadelphia Fed Manufacturing Index, and NY Empire State Manufacturing PMI.

Different Spins on PMI From S&P Global and the ISM

The S&P Global’s survey is sent to more than 400 companies across 19 industries, and the weighting of the results is based on each category’s contribution to domestic GDP. For example, within the report, New Orders are particularly important, so that subindex is assigned a weight of 30% while Inventory Levels is weighted just 10%. 

The ISM’s report equally weighs its subindices. Survey questions include probing CEOs and CFOs about changes they see in their market – whether they are improving, worsening, or are about the same from the previous month. Specifically, PMIs home in on several areas:

• New orders

• Inventory levels

• Production

• Supplier delivery times

• Employment

• Prices Paid

• Imports

That is not an extensive list, but it gives you an idea of the information captured by the surveys. Professional analysts then use these data to make inferences about the state of the macroeconomy and certain major areas such as GDP, inflation, exports, capacity utilization, the labor market, and wholesale inventories. Investors can use PMI reports to uncover opportunities in undervalued or hot growth markets and regions.

Timing the PMI Releases

The headline PMI figures are reported on major financial news outlets the moment they are issued. The ISM’s PMI is released at 10 a.m. ET while S&P Global PMIs hit the tape often at 9:45 a.m. ET, but the days differ depending on the region and whether it is a Flash or Final look. International PMIs, produced exclusively by S&P Global, come during the overnight trading session and impact US futures markets.

50 Is Your Bogey

PMI values range from 0 to 100, with 50 being the demarcation point between economic expansion and contraction. The further away from 50 the figure is, the bigger the chance of changes in GDP growth trends. Again, however, this is a ‘feelings-based’ gauge, not real ‘hard’ economic data. If a manager at one big company is having a rough day, that might impact how they answer the survey! 

Investors can then use PMI data and trends as a gauge of the strength of the economy. Take caution, though, since extremely high PMI values could be a sign of an overheating business landscape while some of the best future stock market returns can happen when PMI levels are downright dreadful – some might even call PMIs at extreme levels “contrarian” investing indicators.

Who Uses PMI Index Data?

It’s no crystal ball, but the headline PMI numbers, and the sub-index data, provide insights into the health across the corporate world. Businesspeople in the management field, suppliers, policymakers, and investors can all benefit from understanding the state of the manufacturing and services sides of the economy.

Executives, for instance, might make major investment decisions, such as building a new factory and hiring hundreds of new workers, if they see solid and steady growth via the PMI report. On the downside, if there is a sudden fall off and volatility in PMI readings, then they might turn more cautious on growth initiatives. 

Suppliers, meanwhile, are often dependent on growth since new orders, one of the subindices, are overly sensitive to changes in business conditions. Such companies might make decisions about future demand based on careful quantitative analysis of both nationwide and regional PMI trends. Additionally, the Prices Paid component of the PMI report offers suppliers clues about how much they can charge for new orders.

Active investors closely watch the monthly PMI reports as they not only can be a bellwether for corporate profits, but unexpected changes could result in policy action from the Federal Reserve or even on the fiscal side from Congress. PMI figures are considered an early look at where the economy will go, often preceding changes in official hard data like the quarterly GDP report and monthly payrolls report. Monitoring changes in the regional and country PMIs as well as the subindices helps you stay on top of the markets.

The Bottom Line

Monthly PMI data produced by the ISM and S&P Global are some of the most widely watched indicators regarding the state of the economy. Corporate executives, Wall Street analysts, monetary and fiscal policymakers, and everyday investors can use the reports to get a sense of business activity. 

As a leading economic indicator, the surveys hit on nearly all areas of the manufacturing and services areas of a region or country. Times are good when PMIs are well north of 50, but a recession is potentially signaled when PMIs fall sharply under the important 50 line.