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What is the Purchasing Managers’ Index (PMI)?

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Many manufacturing companies’ expertise lies in design, materials, and manufacturing processes rather than economic trends and forecasts.  When it comes to understanding economic factors or predicting industry trends, dependable and unbiased information sources are critical.  The Purchasing Manager’s Index, or PMI, is one such credible source of data.

The PMI is a valuable tool for making predictions about what is likely to happen in the economy as a whole, or a particular market.  By bringing together the analysis and insights of leading experts, the PMI helps manufacturers make forecasts and plan upcoming expenditures.

What is the PMI Purchasing Managers’ Index?

There are several purchasing managers’ indices that are released on a regular basis. These are compiled economic indicators based on monthly surveys of private sector companies, in particular the purchasing managers at businesses in the industry in question.

The most popular of these is released by the Institute for Supply Management (ISM), which originated in the United States, and the Markit Group, which creates metrics for over 30 countries worldwide.  There is also the Singapore Institute of Purchasing and Materials Management (SIPMM), which is well respected globally.

For purposes related to this discussion, we will focus on the index supplied by the ISM, which is the most widely used and relevant to the North American manufacturing market.  It is based on a monthly survey sent to senior executives at more than 400 companies in 19 primary industries, which are weighted by their contribution to U.S. GDP.  The PMI is based on five major survey areas: new orders, inventory levels, production, supplier deliveries and employment.  The ISM weighs each of these survey areas equally.  The surveys include questions about business conditions and any changes, whether improving, static or deteriorating.

How is the PMI calculated?

The PMI consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same or contracting. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts and investors.

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, and a reading at 50 indicates no change.  The further away from 50 the greater the level of change.  The PMI is calculated as:

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

P1 represents the percentage of answers reporting an improvement, P2 is a percentage of answers reporting no change and P3 is the percentage of answers reporting a deterioration.

The PMIs are also separated based on manufacturing and services industries, as the former tend to be import dependent while the latter is export dependent.

Who publishes the PMI Purchasing Managers’ Index?

As indicated above, the PMI most pertinent to aluminum and stainless steel markets is the one put out by the Institute for Supply Management (ISM).  This is the oldest and largest supply management association anywhere in the world.  It was first founded in 1915, though it did not begin reporting the PMI until 1948, following World War II.  The organization is a non-profit educational association that offers professionals and organizations who are concerned with supply management the education, training, qualifications, publications and information they need to succeed.

The ISM PMI data can be found on the ISM website, where it is released regularly on the first business day of each month.

How is the PMI used?

Manufacturers, suppliers and investors all closely follow the PMI for the integrity and utility of the information.

Manufacturers make production decisions based on the new orders it expects from customers in future months. Those new orders drive management’s purchasing decisions 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.

Many suppliers make decisions based on the PMI.  Parts suppliers follow the PMI to estimate the amount of future demand for products.  The supplier also wants to know how much inventory its customers have on hand, which affects the amount of production its clients must generate.  PMI information about supply and demand affects the prices that suppliers can charge.  If new orders are growing, the manufacturer may raise prices and accept price increases from its suppliers; but when new orders are declining, the manufacturer may have to lower its prices and demand a lower cost from the market.  A company can use the PMI to help plan its annual budget, manage staffing levels, and forecast cash flow.

Investors use the PMI as a leading indicator of economic conditions.  Trends in the PMI tend to precede changes in the trends of major estimates of economic activity and output, such as GDP, production and employment.  Paying attention to the value and movements in the PMI can yield profitable foresight into developing trends in the overall economy.

Your Technical Services Professional

With so many uncertainties affecting global economic factors right now, understanding pricing and trends is more important than ever.  One thing that we can be certain of is that the demand for aluminum and stainless steel will continue to endure.  That’s why manufacturers need to partner with a trusted and experienced metal supplier who has a demonstrated track record of reliability.

At Clinton Aluminum, our team of dedicated technical professionals has one priority: ensuring our customers have exactly what they need when they need it.  Contact one of our knowledgeable and friendly customer service representatives today to learn more.

 

 

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