3/1/2021 Purchasing Managers' Index (PMI) Definition

ECONOMY ECONOMICS

Purchasing Managers' Index (PMI)

By INVESTOPEDIA STAFF | Reviewed By BRIAN BARNIER | Updated Mar 27, 2020

What is the Purchasing Managers' Index?

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends
in the manufacturing and service sectors. It 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.

Feedback

https://www.investopedia.com/terms/p/pmi.asp 1/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

KEY TAKEAWAYS
The Purchasing Managers Index (PMI) is a measure of the prevailing direction of
economic trends in manufacturing.
The PMI is based on a monthly survey of supply chain managers across 19 industries,
covering both upstream and downstream activity.
The value and movements in the PMI and its components can provide useful insight to
business decision makers, market analysts, and investors, and is a leading indicator of
overall economic activity in the U.S.

CLICK
CLICK TO
TO PLAY
PLAY
https://www.investopedia.com/terms/p/pmi.asp 2/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

1:30

Purchasing Managers' Index (PMI)

Advertisement

Set up and run your

payroll in as little as
an hour.

Save 50% now

How the Purchasing Managers' Index Works

https://www.investopedia.com/terms/p/pmi.asp 3/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

The PMI is compiled and released monthly by the Institute for Supply Management (ISM). The
PMI 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 it be improving, no changes, or
deteriorating. 

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)

Where:

P1 = percentage of answers reporting an improvement  

P2 = percentage of answers reporting no change 

P3 = percentage of answers reporting a deterioration 

https://www.investopedia.com/terms/p/pmi.asp 4/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

Other companies also produce PMI numbers, including IHS Markit Group, which puts out the
PMI for various countries outside the U.S.  

How the PMI Affects Economic Decisions

The PMI and relevant data produced monthly by the ISM from its surveys are critical decision-
making tools for managers in a variety of roles. An automobile manufacturer, for example,
makes 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
Advertisement
keep some inventory on hand at the end of the month.

Take everyday
Suppliers also make decisions based on the PMI. A parts supplier for a manufacturer follows the
bookkeeping off your
PMI to estimate the amount of future demand for its products. The supplier also wants to know
how plate with its customers have on hand, which also affects the amount of production
much inventory
Quickbooks
its clients must generate.Live.
PMI information about supply and demand affects the prices that
suppliers can charge. If the manufacturer's new orders are growing, for example, it may raise
customer prices and accept price increases from its suppliers. On the other hand, when new
orders are declining, 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.

Develop Your Financial Strategy With an Advisor SPONSORED

A comprehensive financial plan can help you make the right investment decisions and prepare
for retirement. To develop a strategy that’s right for you, use SmartAsset’s free tool to get
Talk with an expert
matched with fiduciary financial advisors in just 5 minutes. Learn more about how SmartAsset
can help you reach your financial goals and get your advisor matches now.

Take the Next Step to Invest

Advertiser Disclosure
https://www.investopedia.com/terms/p/pmi.asp 5/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

SmartAsset E*TRADE Betterment

Get matched with Invest in your future Get technology built

fiduciary financial with an E*TRADE IRA for better returns,
advisors in your area and get personalized personalized advice,
in 5 minutes or less guidance one low, transparent
fee.

LEARN MORE LEARN MORE LEARN MORE

Related Terms
ISM Manufacturing Index Definition
The ISM manufacturing index, also known as the purchasing managers' index (PMI), is a monthly
indicator of economic activity based on a survey. more

ISM Non-Manufacturing Index

The ISM non-manufacturing index is based on surveys of more than 400 non-manufacturing (services)
firms' purchasing and supply executives in 60 different sectors. more

Flash Manufacturing PMI Definition

Flash Manufacturing PMI is an estimate of manufacturing for a country, based on about 85% of total PMI
survey responses each month. more

Richmond Manufacturing Index

The Richmond Manufacturing Index is a measure of manufacturing activity around the southern mid-
Atlantic states. more

Leading Indicator
A leading indicator is an economic factor that can be used to predict which way a market or economy may
go in the future. more

Flash Services PMI

Flash services PMI is an early estimate of the Services Purchasing Managers' Index (PMI) for a country.
more

https://www.investopedia.com/terms/p/pmi.asp 6/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

Partner Links

Seamlessly connect w/ the markets on the

E*TRADE Mobile app

Get a free personalized learning experience with

TD Ameritrade.

IG. Low FX spreads, free educational tools.

Trading forex carries a high level of risk.

Related Articles
MACROECONOMICS
Economic Indicators That Help Predict Market Trends

MACROECONOMICS
Why the Purchasing Managers' Index Matters

BEHAVIORAL ECONOMICS
Understanding the Consumer Confidence Index

MACROECONOMICS
Economic Indicators for Canada
https://www.investopedia.com/terms/p/pmi.asp 7/8
3/1/2021 Purchasing Managers' Index (PMI) Definition

INVESTING ESSENTIALS
Economic Indicators You Should Know for Investment

BEHAVIORAL ECONOMICS
Consumer Confidence: A Killer Statistic

TRUSTe

About Us Terms of Use

Dictionary Editorial Policy

Advertise News

Privacy Policy Contact Us

Careers California Privacy Notice

Investopedia is part of the Dotdash publishing family.

https://www.investopedia.com/terms/p/pmi.asp 8/8