Nikkei's Manufacturing PMI and Services PMI numbers are expected today. But what is PMI, and why is it important?
The Nikkei Manufacturing Purchasing Managers' Index and Services Purchasing Managers' Index released today indicated that manufacturing activity in the country grew albeit at a slower pace in August. Manufacturing PMI was at 52.3 compared to the six-month high at 52.7 in July. Slower than expected pick up in new orders and slower than expected pick up in output.
Nikkei said that the indicator "pointed to a further, although weaker, improvement in the health of the sector."
Purchasing Managers' Index of PMI is released every month, and it has an impact on the stock markets.
But what is PMI?
Simply, Purchasing Managers' Index or PMI is an indicator of the business activity that takes place in the month depending on the sector. PMI can be considered a true indicator of business activity as it is calculated every month, as against GDP data that is either quarterly or yearly.
PMI is calculated for in two sectors -- manufacturing and services.
A PMI greater than 50 indicates an expansion in the manufacturing and services sector.
If PMI less than 50, it indicates a contraction in the manufacturing and services sector.
PMI at 50 indicates nil growth, ie neither contraction nor expansion.
How is it calculated?
Nikkei surveys 500 manufacturing companies and nearly 350 private service sector companies to gauge their change in perception of key business sentiment and their performance in the month, to arrive at the index.
PMI considers five indices, which contributes individual weightage to the final index.
For Manufacturing PMI the survey takes stock of: New orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stock of Items Purchased (10%), with the Delivery Times index inverted so that it moves in a comparable direction.
While for Services PMI, the survey examines sales, employment, inventories and prices.
The survey also entails question about inventory buying prices – the price at which the supplier buys, the amount he charges on it, and the price at which it is offered to the customer.
The responses are then aggregated, interpreted, interpolated to churn out a number, which is PMI.
Why is it important?
Since the data presented is based on facts not opinions, it is considered as true measure of the economy.
PMI is widely tracked by purchasing professionals, business decision-makers, analysts, investors and bond markets. Not only that, RBI keenly follows this index to decide key rates in their monetary policy.
The same method is followed around the world to calculate PMI. Keeping that in mind, it is used as a comparison of all world economies.
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