how the pmi works
the pmi is a key economic tool and is among the most reliable leading indicators of the u s economy the index is reported by manufacturing and services the index sheds insight into the business environment and also helps companies get a grasp on where the economy is headed the pmi is calculated based on responses to a survey sent to senior executives at more than 400 companies in 19 primary industries which are weighted by their contribution to u s gross domestic product gdp the surveys include questions about business conditions whether or not they are changing and whether they are improving or deteriorating the pmi is based on five major survey areas each of which is weighted equally the headline pmi is a number from 0 to 100 a pmi above 50 represents an expansion when compared with the previous month a pmi reading under 50 represents a contraction while a reading at 50 indicates no change the further away from 50 the greater the level of change the pmi results are released on the first monday of every month using the pmithe pmi and relevant data produced from the monthly surveys by the ism are critical decision making tools for a variety of areas including management suppliers and investors management can use the monthly pmi results to make key decisions about their own businesses for instance an automobile manufacturer makes production decisions based on the new orders it expects from customers in future months those new orders drive the purchasing decisions of its leadership about dozens of component parts and raw materials such as steel and plastic existing inventory balances also drive the amount of production the manufacturer needs to complete to fill new orders and to keep some inventory on hand at the end of the month suppliers also make decisions based on the pmi a parts supplier for a manufacturer follows the pmi to estimate the amount of future demand for its products the supplier also wants to know how much inventory its customers have on hand which also affects the amount of production its clients must generate pmi information about supply and demand affects the prices that suppliers can charge so if the manufacturer s new orders are growing it may raise customer prices and accept price increases from its suppliers on the other hand when new orders decline the manufacturer may have to lower its prices and demand a lower cost for the parts it purchases a company can use the pmi to help plan its annual budget manage staffing levels and forecast cash flow investors can also use the pmi to their advantage because it is a leading indicator of economic conditions the direction of the trend in the pmi tends to precede changes in the trend in major estimates of economic activity and output such as the gdp industrial production and employment paying attention to the value and movements in the pmi can yield profitable foresight into developing trends in the overall economy 