A Purchasing Managers' Index (PMI) is an economic indicator that consists of monthly reports and business cycle statistics from manufacturing companies in the private sector. This index is produced by retrieving information from purchasing managers at companies in the manufacturing industry. To produce the purchasing manager index, ISM contacts purchasing managers at over 300 manufacturing companies of different sizes and in different locations.
The Purchasing Managers' Index consists of five sub-components: order intake, production, employment, delivery times and stocks of purchased materials.
How does the PMI index work?
The responses from the purchasing managers are compiled into a final PMI number for the month. When the index is above 50, it indicates increased economic activity compared with the previous month and a figure below 50 indicates a slowdown. A figure of 50 indicates that no change has taken place from the previous month.
One of the advantages of using the PMI index is that it consists of answers based on current data and conditions. The outcome of a PMI is based on actual data rather than opinions or how certain areas are perceived.
The fact that the index slides below the 50 mark does not always mean that the economy shrinks, it just goes a little slower. Only at 43 does growth begin to be negative, based on historical data for the US ISM. Indexes can in theory vary between 0 and 100. But levels below 40 and above 60 are unusual.
The PMI index is used by investors to get an idea of how purchasing managers view the future development of their industry. The PMI index can be a measure of market sentiment and form the basis for trading decisions.
About the indicator
Red dashed line = 43 (Recession confirmed)
Yellow dashed line = 50
Green dashed line = 52.9 (Average PMI)
Blue dashed level = 60 (Strength)
All these three zones are based on the average of the PMI index and it is extended on both up and down.
Blue zone = Positive range
White zone = The expected PMI range
Red zone = Negative range
Five different background colors will always be visible and tell the market sentiment.
Black = Recession
Red = Warning for recession
Yellow = Productivity is slowing down
Green = Increased productivity
Blue = Strength in the markets
In the chart you will see a figure over the probability for a recession, a slowdown that could lead to a recession and the probability for increased productivity. That may help when you consider when to buy or sell. You can also read about how long time the PMI index has been in each and every zone and also see the average for the index.
This indicator will only work for MAN_PMI, but could be used in the background of your stock or indices that you analyze for the moment, to always see what market sentiment is dominating. This will also work better if you are looking to buy or sell stocks on the bigger indices like NDX (US), DAX (DE), OMXS30 (SE) and so on. You may turn off some colors in the settings first and only leave the background colors on. The probability info box will not function correctly and could be very annoying. But other than that, you could use it as a market filter.
Finally, I hope that this indicator may help you and if not, maybe you have learned something about what a PMI index is and how it works.
- <<DISCLAMER>> -
These are my own ideas and thoughts. Trading securities is associated with risk and I take no responsibility for any losses. This is not a buy recommendation or a sell recommendation, but only a personal analysis and you should do your own analysis before trading in securities.