Why PMI statistics are important and how reliable are they exactly?
- The market is paying close attention to the Purchasing Managers' Index (PMI). It is an indicator that has the ability to determine the direction of the market. This puts it in the same set of macroeconomic data by national and international statistical offices. Why are these statistics important and how reliable are they exactly?
- The numbers itself are derived from the result of a statistical survey. It is based on hundreds, if not thousands, of surveys sent to purchasing managers of different companies. This process is reminiscent of classic social research methodology, unlike opinion polls during elections, for example. As it is an experimental study, the researchers in charge of it aim to provide a representation of these results. To do this, data is disaggregated by country, sector, and company size. Then they randomly choose companies to send out surveys. Survey questions typically fall into 8-10 main categories. It centers around changes in new orders, production outputs, number of vacancies, future employment prospects as well as the sources of their operating resources. Managers can determine degrees of change at the level of each category. The result is a simple number that one can easily weigh. It is used widely by researchers and institutes, and each entity has its own formula, to calculate the final PMI figure. The calculation process shows how dynamic the PMI is. It combines an assessment of the current situation as well as a possible future forecast. The rigorous research methodology and large sample size make the process as objective as any formal public opinion poll. That's why the market generally considers it reliable data.
How does PMI affect the market?
- This leads us to why investors consider PMI a very important indicator? Take a mutual fund, for example, with a stock portfolio containing several hundred individual items, diverse in both sector and region. The goal of the portfolio manager is to beat the benchmark and achieve higher returns than the major equity indices.
- When the German manufacturing PMI dips below 50 points, it indicates that German corporate growth may be slowing. In this case, the portfolio manager may want to minimize his damage by selling. Not only will they sell, but they will do more than that and as quickly as possible to protect their past profits and avoid any potential losses. Instead of waiting for their stocks to drop, it is better for them to get rid of the risky assets sooner. The result is often strong selling pressure on the stocks and related indices. Also, speculators are well aware of the kind of events a drop in PMI might trigger. Therefore, they tend to take long positions in an attempt to ride the wave. That's the theoretical part of it, but how does it actually work? Like any other indicator, PMI is not infallible either and it is only one of many factors that influence these decisions.