European shares picked up steam after a period of calm activity on strong data forecasts from Europe and China. The Markit Eurozone PMI Composite Output Index showed the largest monthly increase in business activity for more than two years since August 2011. The PMI rose for the fifth consecutive time to reach 51.7, the highest since June 2011. The above 50 readings signal two consecutive months of rising output, in contrast to declining business levels over the last 17 months.
The Purchasing Manager Index is a key parameter to gauge the business and economic conditions in any economy, the most common PMI surveys are the manufacturing and services PMI, which are released for the U.S. and the European countries.
How is the index calculated?
The PMI comprises of five variables which includes new orders, production, employment, finished inventory and supplier delivery time. Survey responses are tallied based on the direction of change from the prior month for each variable, an increase for the month will count as 1, if there is no change or the same as last calculated it will count as 0.5, and a decrease for the current month will be calculated as zero. So if 60 out of 100 reported an increase, 20 reported no change and if there were 20 new orders, then new orders would equal 70 points (60x1+0.5x20). After calculating the points for each variable, the PMI is constructed equally by assigning an equal weightage based on the variable’s points: new orders (0.2), production ( 0.2), employment ( 0.2), delivery point ( 0.2) and finished inventory (0.2). The sum of these values would equal the PMI and this procedure is called “diffusion index”.
Of the underlying variables New Orders and Supplier Delivery Time are leading indicators, production is a coincidental indicator, finished inventory and employment are lagged indicators. The composite PMI of these five variables forecasts the earlier glimpse of the manufacturing sector’s direction. A reading of more than 50.0 indicates improvement in the manufacturing sector or service sector and a reading of below 50.0 suggests deterioration in either the manufacturing or services sector. A PMI score of more than 42.0 will show that a nation’s GDP in good stead and in the path of economic progress, conversely, a PMI score of less than 42.0 means the country is headed to recession, investors use the PMI as an indicator to measure the growth or decline of a country’s GDP
Investors use these surveys as leading indicators of economic health, given their insight into employment, production, inventory and pricing. The Fed uses the PMI Index extensively; this is evident from the minutes published by the Federal Reserve.
Who publishes the PMI ?
The Purchasing Managers Index is published in different countries by companies, for example: at the beginning of each month Markit, ISM, RBC, J P Morgan and several other data gathering institutions publish the latest local readings of the PMI for various countries around the world. In general, most investors trust the two most popular sources the ISM and Markit for PMI data.
With over 3,000 employees, Markit is a leading global financial information services company. Markit collects data from more than 20,000 companies across more than 30 countries every month, the responses are collated, checked and aggregated to provide a vast quantity of data covering the manufacturing, services, retail and construction sectors. The company provides reliable factual data on actual business conditions rather than opinion or confidence based measurements, it is the most comprehensive global economic survey available to professional investors.
The Institute for Supply Management (ISM) manufacturing release is published on the first business day of every month and the non manufacturing release is released on the third business day of the month. The index includes prices paid for all purchases including import purchases and purchases for food and energy excluding crude oil. The production index compares current month production with the earlier month. The ISM which is a non profit group has more than 40,000 members engaged in supply management and purchasing professions.
Importance of PMI Index