What is a PMI Report?

After this week disastrous decline in Japan’s equity markets, I decided it would be appropriate to write an article about PMI reports and what they’re about. Apparently, a PMI report could have considerable influence on risk assets. On Wednesday evening, China’s Flash manufacturing PMI report unexpectedly contracted. This was the first contraction in seven months. The news sent Japanese stocks tanking at a pace unseen since March 2011. Although the PMI report was poor, I felt the decline in risk assets was unwarranted. Let’s delve into the core of the article which is to define what a PMI report is.

What is a PMI Report?

PMI stands for purchasing managers index. According to investopedia.com, a PMI report is a monthly questionnaire survey taken by select companies. The survey results should give an indication of whether private sector performance is improving, deteriorating or staying the same relative to the previous PMI reading. They are three types of PMI reports: manufacturing, services and construction. The reports are typically released on the first three business days of the month. PMI reports are usually nationally, however, they are some regional PMI reports.

Components of a PMI Report

The report is rather simple and calls for rudimentary math to derive the headline PMI number. The headline PMI number is the aggregate of the following components: New Orders, Employment, Suppliers Delivery Times and Stocks of Purchases. Survey participants are asked if conditions in the aforementioned components improved, stood the same or deteriorated relative to the previous PMI reading. Headline PMI readings above 50 indicates an expansion. Readings below 50 indicates a contraction.

Who Issues the Report?    

Markit Group and the Institute of Supply management are the two main producers of PMI reports. Markit Group is a London based financial information firm that was founded in 2003. Initially the firm was created to provide daily credit default swap pricing, but it eventually began to offer a wide array of services as time went by. Markit Group provides PMI reports for 30 countries. The Institute of Supply Management (ISM) is based in Arizona and it produced its first PMI report for the US in 1948. ISM US PMI reports are followed more than Markit’s US PMI reports.

Conclusion

The reason why PMI reports merit attention from market participants is because the survey is factual and virtually free of opinions. Survey participants are asked if a particular component of their business went up, down or stayed the same since the previous report. The companies that are selected to participate in the survey are supposed to reflect the performance of the overall economy. In light of this article, I guess we could see why Japanese stocks took a nosedive on China’s disappointing flash manufacturing PMI report.