How does a purchasing managers index work?
A purchasing managers index works by compiling data from purchasing managers in the manufacturing sector. This data is used it to assess industry conditions and provides an insight into the possible future growth – or lack of – in the sector. One prominent organisation which produces PMIs is the Institute for Supply Management (ISM).
For its PMI, the ISM contacts purchasing managers at more than 300 manufacturing firms of various sizes, and which are based in different locations.
PMIs are calculated by surveys, which ask purchasing managers whether they think business and industry conditions have improved, remained constant or deteriorated compared to the previous month.
The surveys give equal weighting to several categories, which are scored individually by the purchasing managers who take part. Categories include the number of new orders, sector production, supplier deliveries, company inventories and employment figures.
The purchasing managers’ responses are combined to give an overall score for that month’s PMI. A score of more than 50 indicates an expansion of the manufacturing sector, a score of less than 50 indicates a decline, and a score of 50 indicates no change from the previous month.