Any index value greater than 50 indicates expansion. Major contractions in the PMI – and the UK economy – can be seen around the financial market collapse of 2009 and in the early stages of the pandemic in 2020.
What does the PMI include?
The variables included in the PMI depend on the type of purchasing manager index in question. As the index is supposed to be a representative model of an entire sector – or of an economy – its components are selected according to whether they are representative of the aggregate demand for the goods or services concerned. The variables are also weighted according to their relative importance.
As the manufacturing PMI is one of the most significant indices, we can use it as an example. IHS Markit / CIPS manufacturing
The PMI uses the following sub-indices and weights:
- New orders (30%)
- Exit (25%)
- Employment (20%)
- Supplier delivery times (15%)
- Purchasing stocks / inventories (10%)
New orders, production and employment levels account for three-quarters of the weights, reflecting their importance as indicators in determining the health of the manufacturing sector. For a service sector PMI, lead times and supplier inventories are omitted and production levels become the key variable.
How to calculate the PMI
The calculation of the PMI is a sum of the responses to the survey. Since the PMI is a diffusion index, the magnitude of the variation in the variables is excluded from the equation. Instead, the survey aims to establish the direction of the trend and how widespread it is.
With this in mind, survey respondents only have three choices when asked about how each variable performed compared to its performance in the previous month. That is, participants can say that the variable increased, decreased, or stayed the same.