Purchasing Managers Index (PMI)
The leading indicator central banks actually watch
- Define PMI and the 50 threshold
- Tell manufacturing PMI from services PMI
- Use PMI as a leading indicator for GDP and rate decisions
PMI moves currencies more than its data quality deserves. The reason: it's released within days of the month ending, comes from companies actually making decisions, and predicts GDP about 2 months before GDP prints. For traders, that lead time is gold.
What it is, in plain English
PMI is a survey of purchasing managers — the people who buy materials and watch demand. They report whether activity is expanding, contracting, or flat. Above 50 = expansion. Below 50 = contraction. Around 50 = stagnation.
Surveys factories. More volatile, more cyclical, leads GDP turns more sharply. Often the first sign a slowdown is starting.
Surveys the much larger services sector. Less volatile, dominates GDP weight in developed economies. Often confirms the manufacturing signal a month later.
Using it as a leading indicator
PMI typically leads GDP by 1-2 quarters. A composite (manufacturing + services weighted) below 50 for two months running has historically signalled a recession within 6 months in major economies. Central banks watch it carefully — a sharp PMI drop has triggered preemptive rate cuts in past cycles.
UK Manufacturing PMI drops from 51.2 to 47.8 — biggest drop in 3 years. Best read for GBP?
- PMI = survey of purchasing managers
- Above 50 = expansion, below = contraction
- Leads GDP by 1-2 quarters
- Manufacturing leads services; composite confirms
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