Breaking Down the Purchasing Managers Index (PMI)

Stats Fact of the Week

Stats Fact of the Week: Week of June 3, 2019

The Purchasing Managers Index (PMI) is a popular leading indicator for the fluid power industry. Below is an FAQ to help you determine when and how you should use PMI data.

What is the best leading indicator for the fluid power industry?  This question is asked very often and can have a variety of different answers depending on your needs and who you ask. However, PMI data seems to be the most popular answer to this question and for good reason. In a recent article, How Well Do Popular Economic Indicators Correlate to the Fluid Power Industry?, we examined just how well PMI correlates with Total Fluid Power Shipments and discovered that PMI matches Total Fluid Power Shipment trends 96.2% of the time at a 4-month lag length. See the analysis below.

What is the Purchasing Managers Index (PMI)? PMI is a very common and familiar economic indicator, especially if you are involved with manufacturing sector. PMI is a measure of the prevailing direction of economic trends in manufacturing based on a monthly survey of purchasing managers. This information can provide current and future insights to decision makers and is a leading indicator of overall economic activity in the United States.

How is PMI calculated? PMI calculation consists of a diffusion index that is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment. Questions are about business conditions and any changes, and whether they are improving/increasing, have no changes/are the same, or are deteriorating/decreasing. The PMI Index is calculated by adding together the percent of “improving/increasing” responses and one-half of “no changes/same” responses.  The “deteriorating/decreasing” responses carry a value of zero and are not included in the calculation.

Example:  If 60% of the responses are “improving,” 20% are “no changes,” and 20% are “deteriorating,” the PMI index would be 60 + (20/2) = 70.0.

How do you interpret PMI data? The PMI index has the properties of a leading indicator and is a convenient summary measure that shows the prevailing direction of change in manufacturing as well as the scope of change. A PMI index reading above 50 percent indicates that the manufacturing economy is generally expanding, below 50 percent indicates that it is generally declining, and a reading at 50 indicates no change. The further from 50 the reading is, the greater the level of change that is taking place.

Where can I find PMI data? PMI index data and other economic indicator data can be accessed in NFPA’s Customer Market File (CMF), which is available on the NFPA website.

Questions? Contact Eric Armstrong at earmstrong@nfpa.com or (414) 778-3372.