PMI or Puchasing Managers' Index is reflective of the business activity and is assessed for both the manufacturing and services activity. Calculated on a separate basis through survey measures for the manufacturing and services, the PMI of above 50 indicates economic growth while less than the value is figurative of the economic contraction or slow down.
With the help of PMI for manufacturing and services activity, a composite index is then constructed for each of the month to determine the economic health of the country.
The concept of PMI started in the year 1948 by the US based Institute of Supply Management serves as a guidance for economists and investors for future course of time.
Why this index is referred as Purchasing Managers' Index?
PMI is known as though because in the survey it involves purchasing managers at businesses that constitute a particular sector. So, basically respondents comprise of purchasing managers who are questioned about their perception on certain significant business variable that have seen a change from the month before.
Computation of PMI
Based on a qualitative survey, the PMI index primarily takes into these major indicators which include new orders, output, employment and business expectations. The rating is done on these parameters for the improvement or decline on a month on month basis.
How the index is useful for investors?
Released on a month on month basis, these surveys provide insight to broader variables such as sales, pricing and employment. Primarily pushed by customer demand, the trend reflects any probable signs of slowdown or growth of the economy.
For the financial markets it also to an extent indicates corporate earnings and a better PMI index increases the attractiveness of the country over the other.