PURCHASING MANAGERS INDEX (PMI)
1. Context
India's manufacturing performance activity showed a five-month low in September 2023 as per the seasonally adjusted S&P Global India Manufacturing Purchasing Managers Index (PMI)
2. What is the Purchasing Managers Index (PMI)?
The Purchasing Managers' Index (PMI) is an economic indicator that provides insights into the health of a country's manufacturing or services sector.
PMI is widely used by businesses, economists, and policymakers to gauge the economic performance and future trends in these sectors.
It is usually expressed as a numerical value that reflects the prevailing business conditions.
2.1. Key Aspects of PMI
- PMI is typically calculated through surveys of purchasing managers in various industries. These managers are asked about their perception of different aspects of business activity, including new orders, production levels, employment, supplier deliveries, and inventories.
- PMI is usually reported as a number between 0 and 100.
- A PMI value above 50 generally indicates expansion in the sector, while a value below 50 suggests contraction. The farther the PMI is from 50, the stronger the perceived expansion or contraction.
- PMI is considered a leading indicator because it provides insights into economic conditions before official economic data, such as GDP growth or employment figures, are released. It can be used to anticipate changes in economic activity.
- PMIs are calculated separately for manufacturing and services sectors. A Manufacturing PMI focuses on the manufacturing sector, while a Services PMI provides insights into the services sector. These sector-specific PMIs can give a more detailed view of the economy.
Components: PMI is composed of several components, including:
- New Orders: This component measures the number of new orders received by businesses. An increase in new orders often signals growing demand and economic expansion.
- Production: This component reflects changes in production levels. An increase suggests increased economic activity.
- Employment: The employment component indicates changes in the level of employment within the sector. An increase typically means job growth.
- Supplier Deliveries: This measures the speed at which suppliers can deliver materials. Slower deliveries may indicate supply chain issues or increased demand.
- Inventories: Inventory levels can be an indicator of expected demand. A decrease in inventories might suggest an expectation of rising demand.
3. Significance of PMI
- The Purchasing Managers' Index (PMI) is a significant economic indicator with several important implications and uses
- PMI serves as a barometer of the economic health of a country or region. A PMI above 50 generally indicates economic expansion, while a PMI below 50 suggests contraction.
- This provides a quick and easily understandable snapshot of the direction of economic activity, making it a valuable tool for assessing the overall economic climate.
- PMI is a leading indicator, meaning it often provides insights into economic conditions ahead of other official economic data, such as GDP growth or employment figures. As such, it is used by businesses, investors, and policymakers to anticipate changes in economic activity and make informed decisions
4. Way forward
Purchasing Managers' Index (PMI) is a valuable economic indicator that helps gauge the economic health and trends in the manufacturing and services sectors. It provides timely insights into business activity and is widely used by businesses and policymakers for decision-making and economic forecasting
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Source: The Hindu
