What Is PMI?
The Purchasing Managers' Index, commonly known as PMI, is an economic indicator designed to measure the health and direction of business activity within an economy.
PMI surveys ask purchasing managers about changes in important areas of business activity, including new orders, production, employment, supplier deliveries, and inventories.
Because businesses often adjust their purchasing and production decisions before official economic statistics are released, PMI data can provide traders with an early indication of whether an economy is expanding or slowing.
Why PMI Matters to Traders
PMI is particularly useful because it can give traders an early look at changes in economic momentum.
Strong PMI readings can indicate increasing business activity, while weakening PMI readings may suggest that companies are experiencing lower demand or slowing economic conditions.
Strong PMI
Increasing business activity, stronger demand, improving production and potentially stronger economic growth.
Weak PMI
Slowing business activity, weaker demand, declining production and potentially weaker economic growth.
The 50 Level
One of the most important concepts when interpreting PMI is the 50 threshold.
The 50 threshold should be viewed as a general framework rather than a standalone trading signal.
Manufacturing PMI vs Services PMI
PMI data is commonly divided into different sectors. The two most important categories for many traders are Manufacturing PMI and Services PMI.
Manufacturing PMI
Measures business activity within the manufacturing sector. It can provide information about production, new orders, employment and demand for manufactured goods.
Manufacturing data can also provide clues about global trade, industrial demand and commodity consumption.
Services PMI
Measures activity within the services sector, including areas such as business services, financial services, transportation and other service industries.
Services PMI can be particularly important in economies where services represent a large portion of total economic activity.
What Is the Composite PMI?
The Composite PMI combines information from manufacturing and services activity to provide a broader view of private-sector economic conditions.
For traders, the Composite PMI can be useful when attempting to determine whether the overall economy is gaining or losing momentum rather than focusing on one individual sector.
How PMI Can Affect Forex
PMI can influence currency markets because economic growth expectations can affect interest-rate expectations and capital flows.
For example, stronger-than-expected economic activity may increase expectations that a central bank could maintain restrictive monetary policy for longer. Depending on the broader economic environment, this can support the country's currency.
Conversely, significantly weaker PMI data can increase concerns about economic growth and potentially influence expectations for future monetary policy.
PMI Surprise: Actual vs Forecast
Traders should not look at the PMI number in isolation. One of the most important factors is how the actual result compares with the market's expectation.
Positive Surprise
Actual PMI is significantly stronger than expected. This can indicate that economic activity is stronger than markets had anticipated.
Negative Surprise
Actual PMI is significantly weaker than expected. This can indicate that economic activity is deteriorating faster than markets anticipated.
Example: Trading a PMI Release
Imagine that U.S. Services PMI is expected to be 52.0. The market therefore enters the release expecting moderate expansion.
Forecast
52.0
Actual
54.5
Surprise
+2.5
The stronger-than-expected result suggests that business activity is healthier than the market anticipated. A trader could then examine whether the stronger data changes expectations for U.S. growth, inflation, Treasury yields and Federal Reserve policy before forming a directional view.
PMI Should Not Be Used Alone
PMI is most useful when combined with other fundamental and market information.
The goal is not to trade every PMI release. Instead, traders can use PMI as one component of a broader macroeconomic framework.
Using PMI in a Macro Trading Framework
At StarEdge, economic indicators such as PMI can be viewed alongside other fundamental factors to build a broader picture of economic strength and weakness.
Instead of asking whether a single PMI number is bullish or bearish, traders can ask a more important question: Is the overall economic trend strengthening or weakening?
Explore StarEdge ToolsKey Takeaways
PMI measures changes in business activity.
A reading above 50 generally indicates expansion.
A reading below 50 generally indicates contraction.
Manufacturing and Services PMI provide different views of the economy.
Composite PMI provides a broader view of private-sector activity.
The difference between actual and forecast can be more important than the headline number.
PMI can influence expectations for economic growth and monetary policy.
PMI works best as part of a broader fundamental and technical framework.