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Purchasing Managers Index

Why in the News?

S&P Global India Manufacturing Purchasing Managers' Index (PMI) indicates that in December 2022, production in India's manufacturing sector increased by the most in 13 months.

  • The average PMI value reached its highest point in a year during the three months from October to December, at 56.3. It demonstrates how well-off manufacturing is and suggests that it might generate new jobs.

Principal producers of Purchasing Managers Index (PMI)

Three companies primarily produce the Purchasing Managers Index (PMI):

  • The Institute for Supply Management (ISM) was established in 1915 and had its headquarters in Arizona, USA.
  • The Singapore Institute of Purchasing and Materials Management (SIPMM) was founded in 1972.
  • Markit and IHS merged in 2016 to form the London-based IHS Markit Group. IHS was founded in 1959.

Decision-makers, market analysts, and investors can gain valuable insight into a company's economic activity using PMI values and their constituent parts.

What should we know about PMI?

Both the manufacturing and service industries use a measure of business activity known as the Purchasing Managers' Index (PMI). 

  • It is a survey-based measurement examining how respondents' perceptions of a few crucial business factors have changed since the previous month.    
  • A composite index is produced after its individual computation for the manufacturing and services sectors.

How is PMI Operated?

ISM compiles and releases the Purchasing Managers Index (PMI) monthly. 

The survey's results, which are based on responses from senior executives at more than 400 companies in 19 primary industries weighted by their share of the U.S. GDP, are used to calculate the PMI value.

The five main Survey Areas are the primary focus of the Purchasing Managers Index (PMI):

  • Production
  • Inventory levels
  • Supplier deliveries
  • Employment
  • New orders

All five of these surveys are given equal weight by the Institute for Supply Management (ISM). A value between 0 and 100 is used for the headline PMI. 

  • When a PMI is greater than 50, it indicates growth from the previous month.
  • In contrast to a PMI value of 50, which indicates no change, a PMI value below 50 denotes a contraction.

Economic Impact of PMI

As a crucial tool for management and supplier decision-making, PMI significantly impacts the nation's economy. The company's decision-makers, analysts, and investors receive information from PMI about the present and future state of the business. 

Some of the major roles played by PMI are as follows:

  • The suppliers look to the PMI values of a particular company to estimate how much future demand there will be for the desired products. The supplier can also find out from the Purchasing Manager's Index how much stock its clients are holding, which affects the amount of production those clients can produce.
  • The PMI's information about supply and demand may impact suppliers' prices. If the growth rate of new orders increases, the manufacturer may agree to a price increase from its suppliers. As opposed to this, the manufacturer must reduce its prices and demand a lower cost for the parts it buys if the number of new orders declines.
  • The PMI is a tool a business can use to forecast cash flow, manage staffing levels, and plan its annual budget.
  • Investors also use purchasing managers' indexes as a leading indicator of economic conditions. The PMI provides insightful information about a company's economic activity, including its GDP, industrial production, and employment.

What does it mean in terms of the financial markets? 

Investors and the bond markets pay close attention to the PMI because it also provides a reading on corporate earnings. 

  • A strong reading makes an economy more appealing in comparison to rival economies. 
  • In contrast, as measured by the PMI, India's manufacturing activity increased to 57.6 5 in July, while China's manufacturing activity declined for the first time in more than a year.

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