What Is PMI?
The Purchasing Managers’ Index (PMI) is a crucial indicator of the economy’s health. Manufacturing and service sectors make up a significant portion of the Gross Domestic Product (GDP). The PMI provides an accurate overview of operating conditions and working conditions in the private sector, excluding oil production.
What does PMI include?
The index aims to provide decision-makers in companies, financial analysts, purchasing managers, and CEOs with a clear picture of current working conditions.
To calculate the index, a survey is sent monthly to over 600 purchasing managers to determine the relative level of business conditions, including employment, production, new orders, prices, resource delivery, and inventory. The index is then created based on that data.
Two types of PMI
There are two main types of PMI indicators: Manufacturing PMI and Services PMI.
These indicators are issued in many progressive economies (e.g., Germany, France, Spain, Italy, and a general index is issued for the Eurozone as a whole.)
The PMI index is issued monthly, with a preliminary reading published within three weeks of the same month, and a final reading published within a week after the end of the month.
How to read PMI data?
Usually, analysts compare PMI readings for each month to find long-term trends.
If the reading on the index is 50, it indicates that there is no change in the non-oil production sector conditions. A reading above 50 suggests growth in the non-oil private sector, while a reading below 50 reflects a decline and contraction in that sector.
How to use PMI?
The direct impact of the PMI index on currency is moderate. In general, if the actual value of the index is higher than expected, it is considered positive news for the currency. The opposite is true if it comes in lower than expected.
PMI indicators can be used to analyze financial markets in several ways:
Analysts use PMI indicators to predict economic growth in different countries, where any reading above 50 is a sign of economic and industrial growth. Any reading below 50 is a sign of economic and industrial decline. Therefore, these indicators can be used to identify countries and industrial sectors where economic growth is expected in the future, and where investors can invest.
PMI indicators can be used to analyze different industrial sectors. These indicators can be used to identify sectors that are growing faster than others. They show where investors can invest in. For example, if the PMI reading for the automotive sector is higher than the PMI for the textile sector, it may be logical to invest in automotive companies instead of textile companies.
PMI indicators can be used to analyze emerging markets, where these indicators can be used to identify countries experiencing rapid economic growth. Therefore, these indicators can be used to analyze investment opportunities in emerging markets.
PMI indicators can also be used to analyze currencies. These indicators can be used to evaluate the health of the economy in different countries and thus determine the currency to invest. For example, if the PMI for the US economy is higher than the PMI for the European economy, it may be logical to invest in the US dollar instead of the euro.
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