Purchasing Managers Index, or what is known as PMI, is an economic report that draws conclusion from business surveys and indicates business climate in a certain country.
Purchasing Managers Index, or what is known as PMI, is an economic report that draws conclusions from business surveys and indicates the business climate in a certain country during a particular time period. They usually survey several private companies in the country and track indicators like new orders, production, employment, supplier deliveries, etc.
What is PMI Index?
PMI is an index that presents an advance report for companies, economists, and analysts on private sector conditions. In this regard, PMI is often seen as more comprehensive and useful than ordinary economic data such as GDP (Gross Domestic Product).
GDPs are published quarterly, and it is too long for companies to wait for GDP before making important decisions. Besides that, different countries often have different methods of calculating GDP.
The way Eurozone counts their GDP, for example, is different from Japan. Such difference makes them practically incomparable. Contrarily, an independent institution that counts PMI for many countries will certainly use a similar method.
Unlike other economic reports published by government bodies, PMI is commonly held and published by private institutions. This ensures the independence of the survey and lends credibility to the result. Two institutions that publish periodical PMI are:
- Institute for Supply Management (ISM)
ISM organizes monthly US PMI, as well as hosts JPMorgan Global PMI Report. US PMI Report from ISM is published into two parts, Non-Manufacturing, and Manufacturing PMI.
Apart from that, ISM also collaborates with several other establishments to issue Taiwan Manufacturing PMI Report.
- Markit Economics
Markit Economics conducts PMI of about 30 countries, including the Eurozone and countries within it, Canada, China, India, Indonesia, Russia, UK, US, etc.
Markit Economics PMI comprises Manufacturing PMI, Services PMI, Construction PMI, Retail PMI, and Composites. Markit Economics surveys the following countries (depicted on the map):
The Influence of PMI on Forex
PMI comes on a scale of 100, with a median of 50. Any number under 50 means the economy is in contraction, while over 50 suggests business improvement. A decrease could be read as an economic decline during the period, while an increase shows ongoing recovery.
Of course, a 50 is also possible, though it is a very small possibility. However, it means that the conditions are somehow unchanged; no decline for sure, but no progress either.
Although it is originally created to provide much-needed data for companies, in recent years forex traders also keep track of PMI releases. As a result, PMI often determines short trends and may inflict high fluctuations in the forex market after it is released to the public.
PMI releases for the US, UK, Eurozone, Canada, and China are specially marked on fundamental calendars as they sometimes present challenging circumstances.
China PMI has a significant influence on currencies like AUD and NZD, as Australia and New Zealand have relatively close trade relations with China. Disappointing China PMI has been known to push AUD down.
The reason why it has such an impact could very well be because people are unsure whether China government is truthful enough when it comes to bad statistics or signs of economic decline. Therefore, observing PMI becomes as important as observing Government-stamped GDP.
PMI also has a moderate to high influence on currencies like the Euro that's sensitive to economic growth. On 23 January 2014, EUR/USD shot to the peak almost 4 weeks after Markit announced that Eurozone PMI was at its higher since June 2011.
Within Eurozone itself, German PMI can push or pull the Euro. But for countries like the US, PMI usually has low influence and doesn't do much on its currency fluctuations.
Nowadays, traders and investors are not only looking at conventional economic data as their basis in decision-making. They do their own calculations so that when the real data appears, they could digest it faster. That's why you should learn the concept of estimation, expectation, and rumour.