What Is the PMI? Purchasing Managers' Index Explained

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The Purchasing Managers’ Index (PMI) is a monthly economic indicator built from surveys of purchasing and supply managers at private-sector companies. They report whether new orders, production, employment, supplier deliveries and inventories are rising, falling or unchanged compared with the previous month. The answers are combined into a single number from 0 to 100. A reading above 50 signals expansion, below 50 signals contraction, and exactly 50 means no change.

How the PMI Works

The ISM, a nonprofit supply management organization, runs the best-known U.S. survey. Senior executives at companies across many industries report whether business conditions are improving, unchanged or deteriorating. Responses are weighted by each industry’s contribution to U.S. gross domestic product, so the result reflects the shape of the economy rather than an equal vote per sector.

The manufacturing PMI gives equal weight to five components: new orders, production, employment, supplier deliveries and inventories. The services PMI draws on non-manufacturing sectors such as transportation, insurance, construction and education. The ISM also publishes a Hospital PMI, which tracks inventory levels, supplies and patient traffic.

Calculating PMI

Each component starts as a diffusion index. The standard method is:

Diffusion index = (% of respondents reporting “higher”) + 0.5 × (% reporting “the same”)

Respondents reporting “lower” add nothing. If every company reports improvement, the index is 100. If every company reports decline, it is 0. If all report no change, or improvers and decliners balance out, it lands at 50.

For supplier deliveries, the scale is read the other way: slower deliveries count as a positive signal, because suppliers usually slow down when demand for their output is strong. The headline manufacturing PMI is then the average of the five component indexes, using seasonally adjusted data.

Interpreting the PMI

The further a reading sits from 50, the broader the change. A move from 48 to 51 marks a shift from contraction to expansion. A move from 55 to 53 means activity is still expanding, but fewer companies are reporting gains than before.

Example of the PMI

Hypothetical example. Suppose 400 manufacturers answer the new orders question:

• 180 (45%) report higher orders than last month
• 140 (35%) report the same
• 80 (20%) report lower orders

New orders index = 45 + 0.5 × 35 = 62.5

Assume the other four components come in at 54, 51, 49 and 46.5. The headline PMI is (62.5 + 54 + 51 + 49 + 46.5) ÷ 5 = 52.6. Manufacturing is expanding, led by new orders. The inventory reading below 50 adds a further signal: companies are drawing down stock while orders rise, which can lead to more production in coming months.

Who Uses the PMI and Why

• Corporate managers use the results for production, staffing, budgeting and cash flow planning. An automaker sets output based on new orders and existing inventory, and that output drives how much it buys in parts and raw materials.
• Suppliers follow the PMI to estimate future demand, including how much inventory their customers already hold, because that affects how much those customers will order.
• Investors and economists watch the trend. A sustained rise or fall can signal changes in GDP, industrial production and employment before those figures are published. That is why PMI releases can move bond yields, currencies and stock indexes such as the S&P 500.

Impact on Pricing

PMI data on supply and demand can shape the prices businesses charge. When new orders rise, a manufacturer may raise customer prices and accept higher costs from its suppliers. When orders fall, it may cut prices and press suppliers for lower costs. The ISM manufacturing report also includes a separate prices index tracking input costs, which some analysts read as an early signal for inflation measures like the Consumer Price Index.

Global PMI

S&P Global compiles PMIs for individual countries and regions, including a U.S. PMI that is separate from the ISM series, and also publishes a Global PMI. Because the two U.S. surveys use different samples and methods, their readings for the same month can differ, so compare a PMI only with earlier readings from the same publisher.

Limitations of the PMI

• Breadth, not magnitude. A 55 reading could reflect many small gains or a few large ones.
• Survey-based. It captures managers’ reported conditions, not measured output, so it can diverge from hard data such as industrial production or GDP.
• Relative, not absolute. A reading of 49 means conditions worsened slightly versus last month, not that activity is low.
• Sector coverage. The manufacturing PMI, often the most quoted, covers only part of the economy. Services and other sectors can move differently.
• Noise near 50. Small moves around the threshold can reverse the next month, so a trend over several months is a stronger signal than a single reading.

PMI vs. Related Terms

PMI vs. GDP. GDP measures the total value of output over a quarter and is revised after release. The PMI is a monthly survey of direction, published sooner, which is why it is used to anticipate GDP.

PMI vs. CPI. The CPI tracks consumer prices. The PMI tracks business activity, though its prices index can hint at supply-chain cost pressures.

PMI vs. private mortgage insurance. In personal finance, PMI also stands for private mortgage insurance, a cost some borrowers pay on home loans with small down payments. It has no connection to the Purchasing Managers’ Index.

FAQs

The Bottom Line

The PMI matters to corporate managers planning production and staffing, suppliers estimating demand, and investors and economists looking for early signs of changes in GDP and employment. Because it measures how widespread changes are and readings near 50 can reverse, a trend over several months says more than a single reading. Compare any PMI only with earlier readings from the same publisher, since ISM and S&P Global surveys can differ.