The Purchasing Managers' Index (PMI) is one of the most closely watched leading indicators in financial markets. Released on the first business day of each month, it provides an early look at economic conditions before most other data becomes available.
What Is the PMI?
The PMI is a survey-based index that measures the prevailing direction of economic trends in the manufacturing sector. It is based on surveys of purchasing managers at hundreds of companies who report on new orders, production, employment, deliveries, and inventories.
The magic number is 50: A PMI reading above 50 indicates expansion in the manufacturing sector. Below 50 indicates contraction. The further from 50, the stronger the expansion or contraction.
The Two Main PMI Reports
ISM Manufacturing PMI
The Institute for Supply Management (ISM) publishes the most widely followed US manufacturing PMI. It has been released since 1948, making it one of the oldest economic indicators.
- Released: First business day of each month at 10:00 AM ET
- Survey size: Over 400 companies across 18 industries
- Key components: New Orders, Production, Employment, Supplier Deliveries, Inventories
- Market impact: Very high - often moves stocks, bonds, and currencies
S&P Global (Markit) Manufacturing PMI
S&P Global publishes a competing PMI that offers preliminary (flash) readings before the ISM data.
- Released: Flash reading mid-month, final reading first business day
- Survey size: About 800 companies
- Advantage: Flash reading provides earlier signal
- Market impact: Moderate - less watched than ISM but useful for early signals
PMI Interpretation Guide
- Above 55: Strong expansion
- 50-55: Moderate expansion
- 50: No change
- 45-50: Moderate contraction
- Below 45: Strong contraction (recession warning)
Historical note: PMI has accurately signaled every recession since its inception. Sustained readings below 45 have preceded every post-WWII recession.
PMI Sub-Components That Matter Most
New Orders Index
This is the most forward-looking component. Rising new orders signal future production increases. Falling new orders signal potential weakness ahead. Many analysts consider this the single most important sub-index.
Employment Index
This component indicates manufacturing hiring trends. It often leads the monthly jobs report, giving traders an early read on payroll data. Strong employment readings support the broader economy.
Prices Paid Index
This component measures inflation pressures in the manufacturing supply chain. High readings suggest inflationary pressures; low readings suggest disinflation. The Fed watches this closely for inflation signals.
Supplier Deliveries
Slower supplier deliveries (higher reading) indicate strong demand and potential supply constraints. Faster deliveries (lower reading) suggest weak demand or improving supply. This became especially important during supply chain disruptions.
Trading Strategies Around PMI Releases
Strategy 1: Trade the Surprise
Markets react most to the surprise element - the difference between actual and expected readings:
- PMI beats expectations: Bullish for stocks, bearish for bonds
- PMI misses expectations: Bearish for stocks, bullish for bonds
- Focus on the first 15-30 minutes after release for maximum volatility
Strategy 2: Trend Changes
Watch for PMI crossing above or below 50:
- Cross above 50 after being below: Bullish signal for cyclical stocks
- Cross below 50 after being above: Bearish signal, defensive positioning
- These crossings often mark important inflection points
Strategy 3: Sector Rotation
Use PMI trends for sector allocation:
- Rising PMI: Favor industrials, materials, small caps
- Falling PMI: Favor utilities, healthcare, large caps
- PMI below 50: Defensive sectors outperform
Trading tip: The New Orders component leads the headline number. If new orders are rising while headline PMI is falling, the headline may soon follow new orders higher. Watch the components, not just the headline.
PMI and the Business Cycle
PMI provides valuable information about where we are in the business cycle:
- Early expansion: PMI rises from below 50, crosses above 50
- Mid expansion: PMI consistently above 50, often 55-60
- Late expansion: PMI begins declining from peak but stays above 50
- Contraction: PMI falls below 50 and stays there
- Early recovery: PMI bottoms and starts rising while still below 50
PMI Trading Playbook
Pre-release preparation:
- Note consensus expectation
- Check S&P Global flash PMI for preview
- Review regional Fed surveys (Empire State, Philly Fed)
- Identify key stocks: CAT, DE, GE, MMM
- Watch ETFs: XLI (industrials), XLB (materials)
Global PMI Comparison
PMI data is released globally, providing a coordinated view of manufacturing conditions:
- China Caixin PMI: Released first, can set global tone
- Eurozone PMI: Important for global growth outlook
- Japan PMI: Key Asian manufacturing indicator
- US ISM PMI: Most market-moving for US traders
When global PMIs are synchronized (all rising or all falling), the signal is stronger. Divergences may indicate regional economic differences.
Common Mistakes When Trading PMI
- Overreacting to one reading: PMI can be noisy month-to-month
- Ignoring the trend: Direction matters more than level
- Missing component details: Headlines can mask important shifts
- Forgetting services PMI: Services is larger than manufacturing
- Trading without context: Consider other data and Fed policy
Services PMI: The Bigger Picture
Do not forget the ISM Services PMI, released on the third business day of each month. Services represent about 70% of the US economy, making this arguably more important than manufacturing PMI for the overall economy.
- Same interpretation: Above 50 = expansion, below 50 = contraction
- Less volatile than manufacturing
- More relevant for consumer-focused economy
Track Your PMI-Day Trading Performance
Pro Trader Dashboard helps you analyze how your trades perform around economic data releases. See your win rate on PMI release days and optimize your strategy.
Summary
The PMI Manufacturing Index is a powerful leading indicator released on the first business day of each month. Readings above 50 indicate expansion, below 50 indicate contraction. Focus on the surprise versus expectations for short-term trading, but watch the trend for bigger picture positioning. Pay attention to key sub-components, especially new orders and employment. Use PMI in combination with other economic data for a complete picture of economic conditions.
Want to learn more about economic indicators? Read about leading economic indicators or explore the Consumer Confidence Index.