Chicago Purchasing Managers Index (PMI)

Impact: Medium
Data: Chicago Purchasing Managers Association
Release time: .00 am on the last working day of the month
Frequency: Monthly
Source: Chicago Purchasing Managers Association
Revisions: One year
A Purchasing Managers Index (PMI) is an economic indicator; it is a composite index based on five major indicators including new orders, inventory levels, production, supplier deliveries, and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors.
How important is it?
One key area of the report is growth in new orders, which predicts manufacturing activity in future months. Should this PMI report an unexpected change, dramatic reactions automatically follow at the stock market. The Chicago PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month, it is very timely hence quite relevant in making future investment decisions. The Chicago PMI index is perceived by market traders to be a good leading indicator for the ISM, which typically affects the financial markets largely.
How is it computed?
The Institute of Supply Management produces the report. It is an opinion survey and relies on people’s perceptions, not data. It also does not capture any technology improvements or increasing production efficiencies that might alter expectations and actual results. The survey captures opinions of over two hundred purchasing managers in the manufacturing industry in the Chicago Federal Reserve Region. This region covers Illinois, Iowa, Indiana, Michigan and Wisconsin areas since this was the region considered to represent the U.S. manufacturing industry. A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting.
How does it affect the forex rates?
The right balance of international trade generally influences forex rates. Although the report may not immediately result in forex rate changes, it may eventually affect forex in the long term together with a combination of other factors. Supposing the report indicates a sharp decline in purchases of manufacturing raw materials, the result may be a massive decline in production activity in the days to come. A decline in production automatically translates into a decline in exports, which will eventually reduce the country’s forex reserves especially if the decline in local production may force the country to rely on imported products to meet the local population’s demand. This scenario may not only affect the forex rates but also the general growth of the economy as a whole.
On the other hand, if the report indicates an increase in manufacturing material purchases, the economy is on the growth path and the effects can be visible within the next few weeks. This means an increase in production and most probably, exports will increase too leading to high forex reserves that will eventually strengthen the dollar against other international currencies. This correlation with other indicators may make it an influencing factor in the making of monetary policies. Since it actually acts as a prediction of the ISM index, it has a great influence on the Federal Reserve Bank’s short-term changes in interest rates.
How does it affect the stock market?
The effect of this index on the stock market cannot be underestimated. Investors always need to have an insight into possible future occurrences in the sectors they invest in; there is no better way of doing this other than by having a glimpse at the upcoming orders that have been made by purchasing managers in these sectors. This is because the orders can clearly give a clear picture of what to expect in the near future. If the index indicates a possible decline in economic activity due to fewer orders, investors may be very swift at moving their holdings in a bid to try to safeguard their stocks from losing value in the anticipated decline. This may lead to sudden price changes on the particular shares perceived to be headed for a decline in performance. Since it comes a day prior to the release of the ISM, if it predicts an unexpected change in the ISM, it is likely to spark off massive activity as investors try to act in response to its indication.