Understanding PMI Surveys

PMIs are released for the majority of major global economies, with separate surveys covering the manufacturing, services, and construction sectors, in addition to an overall composite gauge measuring output across the economy in its entirety. The data is typically collected S&P Global (previously IHS Markit) and released in two tranches on a monthly basis; a ‘flash’ estimate figure released towards the end of the reference month containing responses from around 85% of the survey pool, before a ‘final’ figure is released at the start of the month following the reference month using responses from the full survey pool. Typically, S&P release ‘final’ manufacturing data on the first day of the month, with the services survey following on the third trading day of the month.

In the US, the ISM PMI (which is calculated in the same manner, albeit using a slightly different sample) is the most closely watched gauge. The ISM do not release ‘flash’ estimates, with their release pattern typically following that of the ‘final’ S&P figures.

The PMI is a diffusion index ranging between 0-100, measuring the month-on-month change in economic conditions. Whereby a reading of 50.0 indicates precisely unchanged conditions, a reading above 50.0 suggests an improvement, and a reading below 50.0 suggests a decline in the metric in question. In order to produce the index, the following formula is used:

PMI = ('% reporting improvement') + (0.5 x ‘% reporting unchanged’) + (0.0 * ‘% reporting decrease’)

Note, the PMI figure is a seasonally adjusted metric. It is therefore, technically, and theoretically, possible for the index to read above 100, or below 0. This would require 100% of respondents to report an improvement, or a deterioration, respectively in a given month, and for the seasonal adjustment factor to then push the data beyond one of these boundaries. This is an extremely unlikely, but plausible, scenario.

Furthermore, it is important to consider how PMI surveys should be interpreted:

• A fall in a PMI gauge from 55.0 to 52.3 represents continued expansion of the sector in question, simply at a slower pace than the month prior
• A further fall in the PMI from 52.3 to 47.7 would represent that the sector in question is now experiencing a contraction
• Another fall from 47.7 to 45.6 implies that said contraction is ongoing, and the pace of said contraction has quickened
• A subsequent rebound in the gauge from 45.6 to 50.0 would imply that the contraction has bottomed out, with activity unchanged compared to the prior month

While it is the headline metric that attracts most attention, and has the most significant impact on financial markets upon release, the PMI surveys released by both S&P Global and the ISM also contain a number of useful sub-indices, the most important of which are:

• Prices Paid - a measure of inflationary pressures within the sector in question
• Employment - a gauge showing how overall employment trends are developing, whether hiring is rising, or layoffs are mounting
• New Orders - a forward looking indicator describing respondents' future purchasing intentions

All of these sub-indices are calculated in the same way as the headline gauge, with 50.0 again representing the breakeven mark between an MoM increase or decrease.