Purchasing Managers’ Index (PMI)

Why in news?

• India’s services sector growth eased slightly in May 2023, but registered the second-strongest rate of growth in close to 13 years.
  • The seasonally adjusted S&P Global India Services PMI Business Activity Index fell from 62 in April to 61.2 in May.
  • The overall S&P Global India Composite PMI Output Index stayed at April’s almost 13-year high of 61.6 as the manufacturing sector expanded at its fastest pace since October 2020.
• The manufacturing PMI for May 2023 revealed that India’s manufacturing activity reached a 31-month high in May.
  • The seasonally adjusted manufacturing PMI rose from 57.2 in April to 58.7 in May, the highest value since October 2020.

What’s in today’s article?

• Purchasing Managers’ Index (about, releasing of PMI for India, methodology, reading of the index, significance of the index)

In Focus: Purchasing Managers’ Index (PMI)

• Purchasing Managers’ Index (PMI) is an economic indicator, which is derived after monthly surveys of different companies.
• It measures activity at the purchasing or input stage.
  • In this sense, it is very different from industrial production which is indicative of actual production.
  • E.g., the Index of Industrial Production (IIP) measures output.
• There are two types of PMI — Manufacturing PMI and Services PMI.
  • The index shows trends in both the manufacturing and services sector.
• PMI does not capture informal sector activity.

Institution responsible for releasing PMI for India

• PMI data for India is released by S&P Global – a global major in financial information and analytics.
  • Earlier PMI data is India was released by IHS Markit before its merger with S&P.
• The Manufacturing PMI measures the performance of India’s manufacturing sector and is derived after a survey of approx. 500 manufacturing companies.

Methodology

• The PMI is derived from a series of qualitative questions. For manufacturing PMI, the questionnaire is sent to manufacturing companies.
• The questions are related to 5 key variables.
  • The variables with their weights in the index are:
    • new orders (30%),
    • output (25%),
    • employment (20%),
    • suppliers’ delivery times (15%) and
    • stock of items purchased (10%).
  • The surveys are conducted on a monthly basis.

Reading of the PMI

• A PMI number greater than 50 indicates expansion in business activity.
  • A number less than 50 shows contraction.
• The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
  • If the figure is higher than the previous month’s then the economy is expanding at a faster rate.
  • If it is lower than the previous month then it is growing at a lower rate.

Significance of PMI

• The index is released much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
  • Hence, it is considered a good leading indicator of economic activity.
• Central banks of many countries also use the index to help make decisions on interest rates.
• It also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets.
• A good reading of index enhances the attractiveness of an economy vis-a- vis another competing economy