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Close Look: PMI data - what’s the big story?

4 months ago

CLOSE LOOK
PMI data - what’s the big story?

As the global economy roars back to life, the monthly announcements of PMI data are closely scrutinised. These data shed light on current economic trends and, crucially at this point, the strength of the recovery. But what does this familiar three letter acronym stand for and what do the data actually represent? Can they really offer clues to future economic growth? We take a closer look.

The PMI or Purchasing Managers’ Index is a nationwide monthly survey, which began in the US in 1948. A questionnaire is sent to 400 US purchasing managers, representing different areas of the manufacturing industries. As these sectors shrank in economic importance, a second survey was set up to cover the services industry. Combining the two gives the Composite PMI. These days, results are released by all major economies on the first day of the following month.

But what does the questionnaire cover? Every month the purchasing managers are asked about five key areas: production, inventory levels, new orders, supplier deliveries and employment. The question is the same for each area. Are conditions this month better, the same or worse than last month? Collating these responses creates an index, essentially a snapshot of the economy. Any reading above 50 indicates a positive trend. Below 50 and the reverse is true.

So what then is the Flash PMI? The snapshot is such a powerful indicator of economic activity, that it offers a reliable steer, even if the survey is not quite complete. And that’s very useful to both business leaders and the financial markets. The Flash PMI appears ten days early, typically when 85% to 90% of the respondents have answered. It provides a leading indicator of economic conditions, later confirmed by the official PMI data.

Recent PMI data have given a strong indication of recovery. Data released in early April soared to levels not seen in the US since 1983 and in the eurozone since records began in 1997. But as global supply chain disruption restrains activity and new Covid-19 variants force some economies back into lockdown, the PMI data continue to offer a vital indication of the changing state of the world’s economies.

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