How Does PMI Affect The Country’s Economy?

Introduction

In this article, we are going to see the historical trend of India’s Purchasing Managers’ Index (PMI). Let us also discuss how does PMI figures affect the economy and various economic as well as investors decisions. In our earlier article, we have discussed what is Purchasing Managers’ Index (PMI) in detail.

India’s Purchasing Managers’ Index

India's Purchasing Managers' Index
India’s Purchasing Managers’ Index
  • Economic growth in India’s manufacturing industry moved up a notch in May 2019. Since the companies responded to strengthening demand conditions by lifting output, quantities of purchases and employment to greater extents. Business sentiment also ticked higher.
  • Nikkei India Manufacturing Purchasing Managers’ Index (PMI) of 52.7 in May (April : 51.8) pointed to the strongest improvement in the manufacturing sector for three months.
  • Consumer goods led the upturn in May, with rates of expansion in output, total sales, new export orders and employment.
  • Aggregate manufacturing output increased at the quickest pace in three months, with survey participants linking growth to new client wins, robust sales and improved technology.
  • Indian manufacturers were confident of a rise in output in the year ahead, with sentiment improving from April. Expectations of pro-business public policies, marketing initiatives, projects in the pipeline and favourable economic conditions are among the reasons boosting optimism.
  • Thus, the PMI result of May 2019 shows a welcoming accelerations in expansion rates across a number of key metrics of manufacturing sector.

WHAT ARE The IMPLICATIONS of PMI FOR THE ECONOMY? 

  • The PMI is 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 (IIP). The official statistics for IIP are released later.
  • RBI also use the results of PMI surveys when formulating monetary policy and thus making the decisions on interest rates. 

How DOes PURCHASING MANAGERS’ INDEX Affect Economic Decisions?

  • PMI is a critical decision-making tool for managers in a variety of roles.
  • A manufacturer, for example, makes production decisions based on the new orders it expects from customers in future months. Those new orders drive management’s purchase decisions about dozens of component parts and raw materials, such as steel and plastic. Existing inventory balances also drive the amount of production the manufacturer needs to complete to fill new orders and to keep some inventory on hand at the end of the month.
  • Suppliers also make decisions based on PMI. A parts supplier for a manufacturer follows PMI to estimate the amount of future demand for its products. The supplier also wants to know how much inventory its customers have on hand. It also impacts the amount of production its clients must generate. PMI information about supply and demand affects the prices that suppliers can charge.
  • For example, If the manufacturer’s new orders are growing, it may raise customer prices and accept price increases from its suppliers. On the other hand, when new orders are declining, the manufacturer may have to lower its prices and demand a lower cost for the parts it purchases.
  • A company uses all of this PMI information to plan its annual budget, staffing levels and to forecast cash flow.

Purchasing Managers’ Index & Investors

  • The purchasing managers’ index is an extremely important indicator for international investors looking to form an opinion on economic growth. If the PMI moves lower in a given country, investors may reduce their exposure to the country’s equity markets and increasing exposure into other countries’ equities with growing PMI readings. It will result into a decline in FDI of the first country and a consequent rise in FDI of second country.
  • 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. 
  • International Investors may also want to look at price-related data when analyzing the impact of potentially higher inflation on international bonds. In general, higher inflation readings mean that investors may want to reduce their exposure to the bond market given the potential for lower prices.
  • Many investors use the PMI as a leading indicator of gross domestic product (GDP) growth or decline. The direction of the trend in PMI tends to precede changes in the trend in major estimates of economic activity and output, such and GDP, Industrial Production, and Employment. Paying attention to the value and movements in the PMI can yield profitable foresight into developing trends in the overall economy.

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