What is PMI Data? Why Does It Matter to Traders?
PMI data is one of the most closely watched indicators for gauging economic health and business sentiment in the financial markets. It often provides early insights into trends within the manufacturing and services sectors, helping investors, analysts and traders assess economic activity.
Whether you’re a trader or investor, understanding PMI can help you anticipate shifts in economic momentum and adjust your strategies accordingly.
What is PMI?
PMI stands for Purchasing Managers’ Index—a key indicator of economic activity in both the manufacturing and services sectors. Compiled through monthly surveys of purchasing managers, it reflects changes in business conditions over a specific period.
The PMI originated in the United States and is now widely used across major economies, including the EU and Asia.
How is the PMI Calculated?
While methodologies may vary slightly between countries and regions, the core structure of PMI compilation is broadly similar. Taking the U.S. as an example, the PMI published by the Institute for Supply Management (ISM) is one of the most recognized PMI indicators globally.
The PMI is calculated through survey questionnaires. The compilers distribute surveys across various industries—covering businesses of all sizes—and collect data based on specific economic components. The data is then used to calculate a diffusion index for each sector.
Finally, these sector-specific indices are weighted according to their contribution to GDP to derive the overall PMI.
The ISM publishes two main types of PMI for the U.S. economy:
- Manufacturing PMI
- Services PMI
While each survey includes about 10 components, only a select few are included in the PMI calculation.
Here’s a summary of the industries and components included in the two PMI types:
| PMI Type | Industry Sectors | Survey Components |
| Manufacturing PMI | Food & tobacco, textiles & apparel, transportation equipment, crude & energy, electrical & mechanical equipment, metal products, etc. | New orders, production, employment, inventories, supplier delivery times |
| Services PMI | Transportation & communications, financial services, IT & information services, hospitality, other personal and business services | Business activity, new orders, employment, supplier delivery times |
How to Read the PMI?
The PMI is compiled and released monthly, tracking shifts in production capacity and economic activity across relevant industries.
In the U.S., the Manufacturing PMI is typically released on the first business day of each month, followed by the Services PMI on the third business day.
The PMI is presented as a value between 0 and 100, with 50 as the benchmark line:
- A PMI reading above 50 signals economic expansion
- A PMI reading below 50 indicates economic contraction
Beyond the actual PMI reading, month-to-month changes and differences between actual and expected PMI figures are also closely watched:
- If the PMI is lower than expected or shows a decline from the previous month, it suggests a weakened economic outlook
- If the PMI is higher than expected or shows growth, it reflects economic expansion
Traders and investors often follow economic calendars to track PMI releases across different countries and regions.
The Impact of PMI
While PMI releases may not have as dramatic an impact on financial markets as other data like the Non-Farm Payroll (NFP) or Consumer Price Index (CPI), the PMI remains a leading indicator of economic conditions. It holds strong predictive value and correlates closely with other economic indices.
Central banks, investors, and market analysts closely monitor PMI data to assess economic momentum and potential policy shifts.
For example:
- During the first quarter of 2020, as COVID-19 spread, the U.S. Services PMI dropped below 50 and fell sharply to levels below 30, signaling a severe contraction. This prompted the Federal Reserve to cut interest rates to stimulate economic activity.
- Following the rate cuts, the PMI started to rise above 50, suggesting a recovery. At the same time, the U.S. stock market (e.g., S&P 500 Index) began to trend higher, reflecting improved investor sentiment and economic optimism.
Why PMI Matters to Financial Markets
While PMI releases may not always trigger immediate market reactions like Non-Farm Payrolls (NFP) or inflation data, they play a crucial role in shaping the broader economic outlook—especially during periods of uncertainty or economic transition.
PMI data helps investors and policymakers detect turning points in the business cycle earlier than many lagging indicators.
- When a country’s economy is under pressure, or when PMI figures come in significantly below expectations, it can raise red flags about slowing momentum.
- Conversely, stronger-than-expected readings can support risk sentiment and boost confidence in growth prospects.
Although the short-term market impact may be limited, PMI trends often feed into long-term investment decisions and central bank policy considerations. This makes PMI an essential component in any trader or investor’s macroeconomic toolkit.