PURCHASING MANAGER’S INDEX (Syllabus: GS Paper 3 – Economy)
Context: India's services PMI hits 6 month high in January.
Purchasing Managers' Index (PMI):
- Meaning: Purchasing Managers’ Index (PMI) is an indicator of business activity, both in the manufacturing and services sectors.
oIt is a survey-based measures that asks the respondents about changes in their perception of some key business variables from the month before.
oIt is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
- Method of Formulation: The PMI is derived from a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators.
oThe questions are related to 5 key variables. The variables with their weights in the index are: new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stock of items purchased (10%).
- PMI Numbers: The indices vary between 0 and 100.
oA figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
- Frequency of its release: The PMI is released at the start of every month.
- Significance of the PMI:
oIt is released much before most of the official data on industrial output, manufacturing and GDP growth becomes available. It is, therefore, considered a good leading indicator of economic activity.
oCentral banks of many countries also use the index to help make decisions on interest rates.
oThe PMI also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a- vis another competing economy.
