Hers’s why the Purchasing Managers Index (PMI) just might be the most useful metric investors can turn to

Unless you’re a full-time investor, you’ve probably only heard of the Purchasing Managers Index (PMI) vaguely – perhaps in the odd AFR article or from watching Bloomberg TV. We’d like to convince you that perhaps you should be paying closer attention, because it could be more useful than you may think.

What is the Purchasing Managers Index?

The Purchasing Managers Index is a widely followed economic indicator that provides insights into the health of the manufacturing and services sectors within a specific economy. It is derived from monthly surveys of purchasing managers at companies, and it reflects the purchasing activity, production levels, new orders, supplier deliveries, and inventory levels within these industries.

The PMI values typically range from 0 to 100. A PMI value above 50 signals expansion in the sector (growth), whilst a PMI value below 50 signals contraction (shrinking activity). If it’s 50…that suggests no change. Beyond a general PMI for the economy (sometimes called a composite PMI) there are PMIs for manufacturing and services.

Purchasing Managers Index surveys often include questions about:

• • New orders
  • Production levels
  • Employment trends
  • Supplier deliveries (indicating supply chain pressures)
  • Inventories

How the Purchasing Managers Index Can Be Useful to Stock Investors:

Since the Purchasing Managers Index reflects the business activity of companies across key sectors, it offers investors an early signal of the health of the economy. A PMI above 50 suggests economic growth, which can lead to positive sentiment in the stock market. Conversely, a PMI below 50 indicates contraction, potentially signalling slower economic activity, which could negatively affect stock prices.

Also, investors can gauge which industries or sectors are growing or shrinking. For example, a strong manufacturing PMI could indicate growth in industrial stocks, while a strong services PMI could benefit companies in the consumer services or tech sectors.

PMI reports are often released on a monthly basis and can cause short-term market movements based on investor perception. A better-than-expected PMI can boost market confidence, leading to higher stock prices, while a disappointing PMI reading might trigger market sell-offs. We will admit that PMIs aren’t watched much in Australia unless a figure is really good or really bad. But in other global exchanges, particularly in North America and Europe, it is more common.

The Purchasing Managers Index can also be a leading indicator of inflationary pressures. A PMI reading that shows growing demand (e.g., high new orders and production levels) might indicate inflationary pressures in the economy. This could influence central banks to adjust interest rates, which can, in turn, affect stock prices.

Similarly, a PMI decline might signal that economic activity is slowing, potentially causing central banks to lower interest rates to stimulate growth, which can be positive for stock prices, especially in interest-sensitive sectors like utilities and real estate.

It’s forward-looking, not backwards

It is important to keep in mind that Purchasing Managers Index is based on forward-looking data (purchasing managers’ expectations), not past-data. So Investors may use it to adjust their portfolios ahead of potential economic shifts.

If the Manufacturing PMI in the U.S. comes in at 55, it means the manufacturing sector is expanding. Investors in sectors like industrials, materials, or logistics might expect to see growth in companies related to those industries. On the other hand, a decline in the Services PMI to below 50 could indicate a slowdown in the service industry, potentially leading investors to avoid consumer-related stocks or look for opportunities in other sectors.

It is important to note that there are limitations. In particular, PMI data represents only a portion of the economy (manufacturing and services) and does not capture every aspect of economic activity. Moreover, PMI figures can be volatile month-to-month, so investors should use them alongside other economic indicators to form a more complete picture.

Nonetheless, it is useful for more than just the manufacturing sector. It can be used as a downstream gague for the consumer and mining sectors. It is also interesting to compare both the manufacturing and services PMIs – if one is better than the other, you can tell which one is better. For instance, the most recent PMI figures for the world (in December 2024) were below 50 in manufacturing and have been in contraction in 5 of the last 6 months. But services is 53.8, indicating expansion.

Conclusion

Overall, the Purchasing Managers Index is a valuable tool for stock investors to track the underlying economic trends and anticipate market movements, but it should be used in combination with other data and analysis for a more comprehensive investment strategy.

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