Ben Ridgeway Ben Ridgeway
Sales Trader, Client Trading Services, Saxo Capital Markets
25 July 2015

What can PMIs tell us about the economy

A Purchasing Managers’ Index (PMI) may give an investor a unique insight into the health of a country's economy. Learn how...

​​​​​In this short explainer we look at what PMIs are, how investors may use them to interpret the health of the economy and help them make investment decisions.

What are PMIs?

Purchasing Managers' Indices are economic indicators derived from monthly surveys of private sector companies. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Why are PMIs important?

PMIs are used as part of central banks' decision-making process when it comes to monetary policy, as the U.S. Federal Reserve recently acknowledged.

PMIs are considered to be leading indicators unlike GDP, which is backward looking data. PMIs track not only a factual data-driven view of the economy, but they also gauge business confidence/sentiment.

The PMI reported in the monthly ISM Manufacturing survey is widely regarded as one of the leading indicators for assessing the state of the US economy. 

Which countries and industries do PMIs cover?​

PMIs are produced for around 30 countries, the most tracked include:

  • China
  • US
  • Germany
  • Euro area
  • Australia
  • UK

PMI data is not available across all industries, but you can find them for:

  • Manufacturing
  • Non-manufacturing
  • Services

What should I be looking for in PMIs?

The most important PMI number is 50. A reading of 50 or higher generally indicates that the industry is expanding.

Also, an index level higher than 42%, over time is considered the benchmark for economic (GDP) expansion.

Context matters

A PMI reading needs to be placed into context. If a country's manufacturing sector has a PMI reading of 51 but it's fallen from 54 over consecutive months; 51 could be viewed negatively.

In China, for instance, the manufacturing PMI has been above 50 for the last four readings. However, it has been on a downward curve since 2010, leading some economists to question if China's economy is in terminal decline.

The type of PMI in relation to the country should be considered too. For instance, the UK doesn't have a large manufacturing sector but does have a large financial centre, therefore more focus falls on services PMI.

How can I use a PMI in a trading strategy?

On its own a PMI can't give you the full picture, other data should be considered as part of a trading strategy, including:

  • ​Job numbers
  • I​nflation
  • Retail sales
  • GDP
  • Value of the asset your buying

However, PMIs offer a snapshot of how parts of the economy are performing. For instance, if manufacturing in the US showed expansion and stayed strong over consecutive months then equity investors might look to invest in companies exposed to US manufacturing.

If manufacturing is growing, it's possible that GDP and inflation are too, which might constitute the need for an interest rate rise.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.