Economic Indicators: Purchasing Managers Index (PMI)

By: Wise-Owl Staff

The Purchasing Managers Index (PMI) is an index that measures manufacturing activity in an economy, based on surveys conducted on a specific set of purchasing managers on a monthly basis. The PMI is a leading indicator of economic health in a particular sector or the economy as a whole. The Purchasing Managers Index is used to measure manufacturing activity by many countries worldwide. The Australian Industry Group measures the Manufacturing PMI in Australia. 

Manufacturing PMI

The Australian Manufacturing PMI measures the manufacturing activity based on seven sub-indices and eight sub-sectors. Any reading above 50 indicates an expansion in manufacturing activity and any reading below 50 indicates contraction.

‘New orders’ is one of the most important sub-indices, and is generally considered a leading factor to changes in the economic output. A rise in new orders usually indicates an expansion in demand for the respective sector. The remaining sub-indices include Production, Sales, Exports, Deliveries, Stocks, and Employment.

Outlined below are the eight sectors that are gauthe Manufacturing PMI:

1. Food and Beverage: This sector measures the manufacturing activity amongst food, beverage and tobacco producers. This is the largest manufacturing sector in Australia and some of the external factors that may impact the output are currency movements, imports and exports.

2. Textiles, Clothing, Furniture and other: This is a relatively small sector and is mainly affected by retail demand.

3. Wood and Paper: The relatively small wood and paper products sector is affected by demand from the food and groceries sector and demand for wood products from the building industry.

4. Printing and Recorded Media: This sector is affected by technology change, import competition and fluctuations in currency. 

5. Petroleum, Coal and Chemicals: This sector covers manufacturers of pharmaceutical products, toiletries and health supplements and other construction materials such as paints and adhesives.

6. Non-Metallic Minerals: This sector gauges the demand for products such as tiles, bricks, cement, glass and other engineering construction and automotive supply chain parts. 

7. Metal Products: Gauging the change in demand for large metal products, this sector is affected by demand from the energy and resources sectors.

8. Machinery and Equipment: This sector measures the demand for automobiles and is generally affected by local currency fluctuations.

Purpose of PMI

Generally, the purchasing managers have early access to data about their company’s performance, which enables this index to be used as a leading indicator of overall economic performance. The PMI also allows economists to identify the ‘boom-bust’ business cycle, and assists analysts to see whether the demand and supply imbalances are readjusting within the sub-sectors and measure the effect on consequent changes in prices for each sector. The PMI is not revised after publication, unlike the other official data. Moreover, the PMI is produced using the same methodology across all countries, enabling accurate international comparisons.

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