Key Takeaways on Manufacturing PMI

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What is Manufacturing PMI?

It is called the Purchasing Managers Index, which is considered a leading indicator of the economic health of the manufacturing sector. It measures the level of a diffusion index based on purchasing managers in the manufacturing industry.

How is it Calculated?

It is calculated by a survey distributed to about 400 purchasing managers, asking them to rate the relative level of business conditions.

PMI Base Components

The overall index is based on five major indicators, including new orders, inventory levels, production, supplier deliveries and the employment environment.

Why This Is Important

As noted, it is a leading indicator of economic health. Businesses react quickly to market conditions, and their purchasing managers hold the most current and relative insight into the company’s view of the economy.

Positive Example

When companies receive new orders, they will need to go to the market and purchase new raw materials in order to fill the orders as soon as possible. Higher new orders mean higher demand from consumers and other companies. In return, this would increase the company’s labor force, cost and revenue all at the same time.

Negative Example

If companies received lower orders this month compared to the previous month, they would then need to purchase fewer raw materials to fill the orders. Lower new orders mean lower demand from consumers and other companies. In return, this would increase the company’s cost, while revenues may drop, which could lead to layoffs.

Expansion vs. Contraction

The PMI base reading is 50. A PMI reading under 50 represents contraction, and a reading above 50 is considered an expansion. A 50, on the other hand, means there is no change (neither expansion nor contraction).

Imports & Exports

PMI also provides information on imports and exports, which are important statistics for businesses that operate overseas. Assume, for example, that the automobile manufacturer purchases steel in the United States from China. If imports are increasing, that trend will have a negative impact on US firms that sell the same product. On the other hand, if exports by parts manufacturers are increasing, a parts supplier may demand higher prices from US companies that need to purchase its products.

Which Component Matters The Most?

Traders usually look at the overall index which is the Manufacturing PMI. More often than not, beginner traders think that a higher reading should have a positive impact on the currency and a lower reading should be negative on the currency. However, this is not the case. Traders need to look at all of the components, especially new orders, employment and even exports. If the PMI comes with a higher reading, we need to understand why. Is it the employment figures? Or the new orders? Or maybe the inventories? All of these factors matter. As long as employment, new orders and exports are higher; there would be a positive impact on the local currency. As for the negative side, if the PMI comes in higher due to higher inventories, while new orders, employment, and exports decrease, this would have a negative impact on the local currency, even if the PMI base reading is higher. It is not a one-way bet.

However, this is not the case. Traders need to look at all of the components, especially new orders, employment and even exports. If the PMI comes with a higher reading, we need to understand why. Is it the employment figures? Or the new orders? Or maybe the inventories? All of these factors matter. As long as employment, new orders and exports are higher; there would be a positive impact on the local currency. As for the negative side, if the PMI comes in higher due to higher inventories, while new orders, employment, and exports decrease, this would have a negative impact on the local currency, even if the PMI base reading is higher. It is not a one-way bet.

Today’s Expectations

Indicator

Forecast

Prior

Spanish Manufacturing PMI

51.6

51.0

Swiss Manufacturing PMI

51.9

51.0

Italian Manufacturing PMI

50.2

49.8

French Manufacturing PMI

49.5

49.5

German Manufacturing PMI

54.3

54.3

Euro Zone Manufacturing PMI

52.6

52.6

UK Manufacturing PMI

52.1

53.3

US Manufacturing PMI

50.4

49.4

 

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