Purchasing Managers Index
The Purchasing Managers Index (PMI) is a monthly survey-based diffusion index that measures the business conditions faced by purchasing managers in manufacturing and services sectors, with a reading above 50 indicating expansion and below 50 indicating contraction.
The PMI was pioneered by the Institute for Supply Management (ISM) in the United States and has since been replicated globally by S&P Global (formerly IHS Markit) and national statistics agencies. The ISM Manufacturing PMI — one of the most closely watched economic releases in the world — surveys purchasing and supply executives at over 400 U.S. manufacturing companies across five equally weighted components: new orders, production, employment, supplier delivery times, and inventories. A composite reading above 50 signals that manufacturing is generally expanding; below 50 signals contraction.
The diffusion methodology is simple but powerful. Survey respondents answer each question as 'better/higher,' 'same,' or 'worse/lower' compared to the prior month. The index for each component is calculated as the percentage of respondents reporting improvement plus half the percentage reporting no change. The composite PMI is the average of the five sub-components. Because the survey captures the forward intentions and current conditions of the managers who actually place orders and manage supply chains, it often signals turning points in economic activity before they appear in harder data like industrial production or GDP.
The ISM Services PMI (also called the Non-Manufacturing PMI) covers the services sector — representing about 70% of the U.S. economy — across similar dimensions: business activity, new orders, employment, and supplier deliveries. Since the services sector is larger and more resilient than manufacturing, this index is arguably even more important for assessing the overall health of the U.S. economy, though the manufacturing PMI receives more attention due to its longer history and tighter link to global trade.
For investors, PMI data is a high-frequency, forward-looking input. When the ISM Manufacturing PMI falls below 50 for several consecutive months — as it did throughout most of 2023 — it signals weakness in industrial production, freight, and capital spending that ripples into industrial stocks, materials companies, and transportation equities. Conversely, a sustained PMI above 55 typically correlates with strong earnings growth for cyclical industrials. The new orders component is particularly watched as a leading indicator within the already-leading PMI framework.