This US indicator is as ubiquitous to stock markets as fish to water - why? Its respondents have a birds-eye view on what can keep the economy humming.
The purchasing manager's index, or PMI, is often cited by analysts, business journalists or other investment experts reporting on the US economy. What exactly is this widely watched economic indicator and what is it based on? LGT Private Banking Europe’s Senior Investment Writer Alessandro Fezzi explains what - and why - you should know about it.
Released monthly by the Institute for Supply Management (ISM), the oldest and largest supply chain management association in the world, the Purchasing Manager Index, or PMI, enjoys a key role in fostering investor hopes for stocks and bond prices. It is one of the most reliable indicators of economic health and growth.
The ISM is often first to raise alarm about factors that could give investors pause. The ISM's more than 50,000 members worldwide are highly attuned to changes in business conditions because they spend their days buying goods such as raw materials for companies.
In fact, companies are dependent on their purchasers for early, reliable advice about everything from where to buy products and services, pricing, or supply chain problems that could hamper production. The ISM's respondents typically maintain extremely close ties to suppliers and coordinate the logistics involves in inventory, budgeting, staff management - all the factors that ensure companies can produce on time and within budget.
One of the ISM's most closely-watched readings flags which sectors are struggling with a rise in the prices to procure various goods and raw materials - investors take any climb in prices as a predictor of tight supply in some sectors. the monthly poll of purchasers anchored in the real economy make the ISM reading a key piece of data for anyone - professional or dabbler - who follows financial markets.
The ISM, or Institute for Supply Management, was originally founded in 1915, but has lost nothing of its meaning for market watchers. The values can express growth (anything over 50 points), contraction (less than 50 points), or an unchanged state (precisely 50). To compile the PMI, the ISM asks purchasing managers whether activity in their company is picking up, slowing, or holding stagnating.
The ISM's two most important purchasing manager indicators track the US' manufacturing sector and its services sector. While the latter makes for a far larger proportion of the economy, market-watchers care more about the industrial-based indicator because it has historically been a more accurate harbinger of the US economy.
The manufacturing PMI signals general US economic growth already from a value of 48.7 points upwards. For the last 75 years, ISM has regularly polled more than 300 purchasing professionals in computer and electronics, petroleum and coal, and a host of other industrial sectors.
The other key index - ISM non-manufacturing - queries more than 400 companies in more than 15 sectors on employment, pricing, and inventory. It reflects the mood of America’s service sector - the largest in the U.S.
The monthly ISM surveys have advanced to one of the most closely watched bellwethers in financial markets in recent years. A favorable PMI - more than 50 points - broadly signals growth. Because investors take this to mean higher profits from the companies polled, it can kick off a burst of trading activity. The ISM releases the manufacturing index data on the first working day of the month, and the non-manufacturing two days later.
Header visual © GettyImages / Marco Bottigelli.