Purchasing Managers Index (PMI)

Purchasing Managers Index (PMI) is a survey-based indicator that measures business conditions in the manufacturing and services sectors. Each month, purchasing managers at hundreds of companies are asked whether output, new orders, employment, supplier delivery times and inventories were better, the same or worse than the month before.

How it reads

PMI is a diffusion index built around the level of 50. A reading above 50 means more managers reported improvement than deterioration, so the sector is growing. Below 50 means it is shrinking, and 50 means no change. The number measures how widespread the change is, not how big it is: a print of 55 says growth is broad, not that output jumped 5 percent.

It is a leading indicator because purchasing managers are first to feel a shift in demand. They place the orders and chase the parts, so a slowdown reaches their desks before it reaches the GDP figures, often months ahead.

The detail that matters

Look past the headline to the new orders subindex, the most forward-looking part of the survey, because today's orders are tomorrow's production. The employment subindex feeds straight into expectations for the jobs data such as Non-Farm Payrolls, and the prices-paid subindex is an early read on inflation. A headline holding at 51 while new orders fall below 50 is a warning the top-line number hides.

Watch the flash release too. It lands about a week before the final figure and tends to be the bigger market mover, since it is the first look at the month.

Why it matters in forex

A currency follows what its central bank is expected to do with interest rates, and PMI is one of the earliest clues. A reading that beats the forecast points to a stronger economy and firmer policy, which tends to lift the currency, while a clear miss weighs on it. As with every release, the surprise versus the forecast moves price more than the level on its own.