PMI explained

Purchasing Managers Index — the leading indicator of growth.

TL;DR

PMI (Purchasing Managers' Index) is a survey-based indicator of business activity. Above 50 = expansion. Below 50 = contraction. PMI is a leading indicator — it moves before GDP does.

How it's built

Purchasing managers answer: are new orders, output, employment, suppliers' delivery times, and inventories better, worse, or the same? Weighted into a single index. 50 = no change.

Two flavours

Manufacturing + services cover both halves of the economy.

→Manufacturing PMI — factories. More cyclical, leads turning points.
→Services PMI — banks, healthcare, retail. Larger share but less cyclical.
→Composite PMI — weighted average.
→Flash PMI — early estimate ~10 days before final. More volatile but timelier.

Why it leads

Purchasing decisions today reflect expectations about the next 3–6 months. PMI inflects before GDP, before unemployment, before earnings. One of the few real-time leading indicators.

Worked example

Reading a PMI shift

Manufacturing PMI 6-month trend.

1Month 152.5 (expansion)
2Month 251.8
3Month 350.4
4Month 449.1 (contraction begins)
5Month 548.5
6Month 647.8
7ImplicationManufacturing cycle rolling over — earnings revisions likely follow

Takeaway

Sub-50 PMI doesn't mean immediate recession, but sustained sub-50 manufacturing has preceded most US slowdowns by 6–12 months.

Common mistakes

What to avoid

!Treating one print as decisive — trend matters far more
!Watching only manufacturing — services is 70%+ of developed economies
!Ignoring sub-indices — new orders, employment, prices diverge sometimes
!Confusing flash PMI with final — flash is timelier but revised

Self-check

Test yourself

Q1What does PMI above 50 indicate?+

Expansion — more firms reporting improvement than deterioration.

Q2Why is PMI a leading indicator?+

Purchasing decisions reflect 3–6 month expectations, so it inflects before GDP and employment.

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