Purchasing Managers’ Index is normally shortened to its acronym, PMI. In U.S it is known as ISM Index, too. It is a macroeconomic indicator that shows a country’s economic situation regarding several sectors of the economy. It is very common to find this index referring to manufacturing and service sectors, and to a lesser extent, the construction sector. It measures the strength of production, new orders, prices and occupation of each sector.

This index is made by the company “Markit Economics” which in United States it is enhanced with the collaboration of the ISM (Institute for supply Management), where it carries out the name ISM Index. The “PMI Manufacturing Index” reflects the economic situation in the manufacturing sector; which is the one that shows first any signs of economic recessions, so it is usually taken as an early indicator of an economic cycle. The same thing occurs with the “PMI Services Index”. This is the reason why the index’s importance is increasing in the last few years among investors. The data published relating PMI is monthly, and its information is obtain through surveys made to managers in the purchase department who belong to the most important private companies in each sector. Its methodology is peculiar for there is no question asked requiring specific information. The survey is based in a series of questions regarding five fields:

  • New orders (30%)
  • Production (25%)
  • Occupation (20%)
  • Delivery times from suppliers (15%)
  • purchase stocks (10%)

As we may observe, each field is weighted according the importance of each one of them. This way, the purchase manager is asked if, for instance, production has being higher, fewer or the same as the previous month. Depending on the number resulting from the index, it will have one meaning or another. If the index is below 42 it anticipates a national economic recession, below 50 indicates contraction and, on the contrary, if it is above 50 it indicates expansion. Also, if the data is higher than the forecast, it could also mean that it is positive information for equities (such as shares) and for the currency (dollars, euro, etc.). If the data is lower than the forecast, the interpretation would be the opposite; negative for equities and the currency. In U.S., financial markets find ISM Index very important due to its influence on the Federal Reserve’s monetary policy.