The Importance of PMIs
The Purchasing Manager Index or PMI is a leading indicator used by analysts, investors and economic policy makers to assess the health of an economy. It is based on the responses of a monthly survey conducted on purchasing and supply executives across the various sectors of the economy. In the survey, the respondents are asked about their views on several key issues such as:
- Backlog of Orders – whether it is increasing or decreasing
- Customer Inventories – The level of inventories held by their customers
- Employment – Whether it is rising or falling
- Imports – changes in the level of imports
- Inventories – Changes in stockpile levels
- New Export Orders – Changes in the level of exports
- The level of new orders
- Prices – whether cost of raw materials is increasing or decreasing
- Production – change in the level and direction of production
- Supplier deliveries – Whether there is an increase or decrease of delivery time
The responses of the survey are collated and then compiled as a report to be released on the first business day of the coming month. The PMI is published by different companies and institutes such as the Institute for Supply Management (ISM), Markit, RBC and JP Morgan from the local readings of the surveys conducted in different countries to guide traders.
Interpreting the PMI
The reading of the PMI is based on a baseline reading of 50. Any reading above the 50 level is an indication of growth in an economy for the previous month. Any reading which is below the 50 level is an indication that the economy was contracting during the previous month. As for readings which fall on the baseline of 50, it shows the number of businesses reporting a rise in growth is the same as the number of businesses reporting a decline in growth. It is interesting to note that during the ISM press release for the PMI reading of November 2016, the ISM mentioned that based on historical observations indicated that an average PMI reading of 50.8% corresponded with a 2.4% increase in real GDP for the US economy.
When trading binary options, the understanding and interpretation of PMIs are very important for the success of a trader.
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