PURCHASING MANAGERS INDEX (PMI) - ECONOMY

News: India's manufacturing activities remain strong in October: survey

What's in the news?

       Manufacturing activities in India remained robust and price pressures were contained in October as new orders and production rose at a slower but stronger pace, according to a monthly survey released on November 1.

Key takeaways:

       The seasonally adjusted S&P Global India Manufacturing Purchasing Managers Index (PMI) was up from 55.1 in September to 55.3 in October.

       The October PMI data pointed to an improvement in overall operating conditions for the 16th straight month. In PMI parlance, a print above 50 means expansion while a score below 50 indicates contraction.

       The Indian manufacturing industry again showed signs of resilience in October, with factory orders and production rising strongly despite losing growth momentum.

What is the PMI?

       It is a survey-based measure that asks the respondents about changes in their perception of key business variables as compared with the previous month.

       It is an index of the prevailing direction of economic trends in the manufacturing and service sectors.

 Objectives:

       The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.

 Calculations:

       It is calculated separately for the manufacturing and services sectors and then a composite index is also constructed.

       The PMI is a number from 0 to 100.

 Takeaways:

       A print above 50 means expansion, while a score below that denotes contraction.

       A reading at 50 indicates no change.

       If the PMI of the previous month is higher than the PMI of the current month, it represents that the economy is contracting.

       It is usually released at the start of every month.

       It is, therefore, considered a good leading indicator of economic activity.

 Compiled by:

       PMI is compiled by IHS Markit for more than 40 economies worldwide.

       IHS Markit is a global leader in information, analytics and solutions for the major industries and markets that drive economies worldwide.

       IHS Markit is part of S&P Global.

       As the official data on industrial output, manufacturing and Gross Domestic Product (GDP) growth comes much later; PMI helps to make informed decisions at an earlier stage.

 IIP vs PMI:

       It is different from the Index of Industrial Production (IIP), which also gauges the level of activity in the economy.

       IIP covers the broader industrial sector compared to PMI.

       However, PMI is more dynamic compared to a standard industrial production index.

 What is the Significance of PMI?

1. Provides a reliable expectation of Economy:

The PMI is becoming one of the most tracked indicators of business activity across the world.

It provides a reliable expectation of how an economy is doing as a whole and manufacturing in particular.

2. Indicator of Economic Activity:

       It is a good gauge of boom-and-bust cycles in the economy and closely watched by investors, business, traders and financial professionals besides economists.

       PMI is also regarded as a leading indicator of economic activity since it is released at the beginning of every month.

       It comes before the official data on industrial output, core sector manufacturing and GDP growth.

3. Helps in Decision Making:

       The PMI is used by central banks to set interest rates.

       Besides influencing equity market movements, PMI releases also impact bond and currency markets.

4. Enhances Attractiveness of the Economy: A good reading of PMI enhances the attractiveness of an economy vis-a-vis other competing economies.

       Suppliers can decide on prices depending on PMI movements.