PMI Index Concept, calculation and market performance Exceptions

Purchasing Managers’ Index (PMI) is one of the important indices used to measure the production activity of an economy. Published monthly by reputable organizations such as the American Institute of Purchasing Management (ISM), the China Institute of Purchasing Management (Caixin), and the Japanese Purchasing Management Institute (JMMA), the PMI index provides provides important information about a country’s economic situation. In this article, we will learn about the concept, calculation and impact of the PMI index on the foreign exchange market.

What is PMI?

The PMI index is an index that measures the production activity of an economy based on a survey of purchasing managers’ opinions. Purchasing managers are people responsible for managing the procurement of raw materials, supplies, and equipment for a business. They have an overview of the production and consumption situation of businesses, so their opinion is very important in evaluating a country’s economic performance.

The PMI index is calculated on a scale of 0-100, in which:

• Score 50: The economy is in balance
• Score above 50: The economy is expanding
• Score below 50: The economy is shrinking

With this index, level 50 is considered the balance between expansion and contraction of the economy. When the PMI index exceeds 50, it shows that the economy is experiencing positive development, and conversely, when the PMI index is below 50, the economy is facing difficulties and may be entering a recession. .

PMI indexes in manufacturing and services

The PMI index is divided into two main categories: manufacturing PMI index and service PMI index.

Manufacturing PMI index

The manufacturing PMI index measures the production activities of factories, enterprises, and companies in an economy. This index includes factors such as:

• Output: This is the most important index in the manufacturing PMI index, showing the production level of businesses in a month.
• New orders: This metric measures the number of new orders placed into production in a month.
• Capacity utilization: This index shows the level of capacity utilization of businesses in production.
• Raw material inventory: This index measures the inventory level of raw materials in production, showing the enterprise’s preparation for production in the near future.
• Recruitment: This index measures the level of recruitment of businesses in manufacturing, showing the development of the economy and the employment situation.

Services PMI index

The services PMI index measures the service activities of businesses in an economy. This index includes factors such as:

• New activity: This is the most important index in the services PMI index, showing the level of activity of service businesses in a month.
• New orders: This metric measures the number of new orders placed into the service in a month.
• Manufacturing activity: This index shows the level of production of service businesses in a month.
• Inventory: This index measures the inventory level of service businesses, showing the business’s preparation for providing services in the near future.
• Recruitment: This index measures the level of recruitment of service businesses, showing the development of the economy and the employment situation.

Difference between manufacturing and services PMI index

The manufacturing and service PMI indexes have some basic differences as follows:

• Survey subjects: The manufacturing PMI index surveys purchasing managers in the manufacturing sector, while the service PMI index surveys purchasing managers in the service sector.
• Scope of survey: The manufacturing PMI index surveys businesses in the manufacturing sector, while the service PMI index surveys businesses in the service sector.
• Measurement factors: The manufacturing and services PMI indexes have different measurement factors, reflecting the activity of each economic sector.

The impact of the PMI index on the foreign exchange market

The PMI index is one of the important economic indicators tracked by investors and traders in the foreign exchange market. Changes in this index can affect the value of the currency and related currency pairs.

When the PMI index increases, it shows that the economy is experiencing positive development and can lead to an increase in consumption and production demand. This can increase the value of the currency and related currency pairs.

Conversely, when the PMI falls, it shows that the economy is struggling and could lead to a recession. This can reduce the value of the currency and related currency pairs.

Factors affecting the PMI index

The PMI index can be affected by many different factors in the economy. Some key factors that can influence the PMI are:

• Monetary policy: The central bank’s monetary policy can influence the level of economic development and thus the PMI.
• Trade situation: Changes in a country’s trade situation can affect manufacturing and services activity, which in turn affects the PMI index.
• Political situation: Fluctuations in a country’s political situation can impact economic activity and therefore the PMI index.
• Weather: Weather can affect a country’s production and services, which in turn affects the PMI index.

How to calculate PMI index

The PMI index is calculated based on a survey of purchasing managers’ opinions. Purchasing managers will be asked to provide an assessment of the business’s production and consumption situation that month. Then, these opinions will be aggregated and calculated into the PMI index.

To calculate the PMI, purchasing managers will be asked to make assessments on factors such as output, new orders, capacity utilization, inventory and hiring. Each of these factors will be assigned a score from 0-100, then these scores will be aggregated and calculated into the PMI index.

Analysis of US PMI index

The US is one of the countries with the largest economies in the world and the US PMI index is considered one of the most important indicators in the foreign exchange market. The US PMI index is published monthly by the US Institute of Purchasing Management (ISM).

According to ISM data, the US PMI index in August 2021 decreased to 59.9 points compared to 60.6 points the previous month. This is the first decrease in the US PMI index in 7 consecutive months, showing a slowdown in domestic manufacturing and service activities.

However, despite the slight decrease, the US PMI index remained high, showing that the economy is continuing to recover from the COVID-19 pandemic. This could create positive pressure on the USD and related currency pairs.

What makes the PMI an important indicator in Forex?

The PMI index is considered one of the most important indicators in forex trading because it can reflect the development of a country’s economy and consumption situation. If the PMI index increases, it shows that the economy is experiencing positive developments and can create upward pressure on the value of that country’s currency.

In addition, the PMI index can also reflect a slowdown or recession in the economy, thereby creating downward pressure on the value of that country’s currency. Therefore, investors and traders often use the PMI index to make trading decisions and evaluate the economic situation of a country.

Ways to use the PMI index in forex trading

There are many ways to use the PMI index in forex trading, for example:

• Tracking trends: Tracking changes in the PMI index can help investors and traders identify economic development trends and make appropriate trading decisions.
• Comparison with previous data: Comparing the current PMI with previous data can help investors and traders evaluate changes in the economy and make trading decisions.
• Combined with other indicators: The PMI can be combined with other indicators such as CPI, GDP or unemployment rate to evaluate the economic situation and make trading decisions.

Benefits of tracking PMI in forex trading

Tracking the PMI index can bring many benefits to investors and traders in the foreign exchange market, including:

• Make accurate trading decisions: Tracking the PMI index can help investors and traders make accurate trading decisions based on economic development trends.
• Diversify investment portfolio: The PMI index can be used to evaluate the economic situation of many different countries, thereby helping investors diversify their investment portfolio and reduce risk.
• Increase profit opportunities: Tracking the PMI index can help investors and traders find trading opportunities with high profit potential.

Conclude

The PMI index is one of the most important indicators in forex trading, allowing investors and traders to evaluate the economic situation of a country and make appropriate trading decisions. Tracking the PMI can be beneficial and is one of the ways to increase your chances of profit in forex trading. However, using the PMI index needs to be combined with other factors to make accurate trading decisions.