Context: The seasonally adjusted PMI reading moved up from 55.3 in February to 56.4 in March, signalling the strongest improvement in operating conditions in 2023 so far. A reading of over 50 on the PMI indicates an uptick in economic activity.
About PMI
- PMI is an indicator of business activity -- both in the manufacturing and services sectors. It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
- It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
- The PMI is derived from a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.
- A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data. If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.
Significance
- The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available. It is, therefore, considered a good leading indicator of economic activity. Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later. Central banks of many countries also use the index to help make decisions on interest rates.
- The PMI also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a-vis another competing economy.
Difference Between PMI and IIP
| Purchasing Managers Index (PMI) | Index of Industrial Production (IIP) |
| Published by Nikkei | Published by National Statistical Office |
| Does not track the actual Production | Tracks the actual Production |
| Covers only 500 private sector companies | Covers both Private Sector as well as PSUs |
| Covers both Manufacturing and Services | Covers only the Manufacturing Sector |
| Less Comprehensive since it covers only private sector companies | More Comprehensive |
| Not used for GDP calculation | Used for GDP Calculation to account for the unorganised sector |