Purchasing Managers’ Index is one of economic indicator resulted from monthly surveys of private sector companies. The surveys are accomplished amongst 727 different companies in different areas and based on industrial standard which is divided into 20 main categories where each category has contributed to the GDP. It’s generally known as the best indicator to forecast the manufacture sector.
The PMI surveys reflect the economic activities within a particular country and the result from those surveys are presented in the form of percentage number. If the PMI is above 50%, it means the industrial sector is growing, and its currency tends to be stronger. At this point, we can say that there is a growing in the orders and supplies because of an increasing point in term of production capacity as well as the development of new industrial units. This condition makes the consumption power among people and the number of liquid cash also develope significantly. On the contrary if the PMI is below 50%, it means the industrial sector is slowing or recessing and followed by the opposing condition with the prior PMI percentage.
PMI has five important indexes:
- New orders from the costumers: 30%
- Inventories: 25%
- Production level: 20%
- Speed of suppliers deliveries: 15%
- Employment level: 10%
PMI is also treated as a significant indicator in forex market, since it reflects the growth of production sector within a particular country. From scale A-E (where “A“ refers to very important indicator and “E” refers to not-important-at-all indicator), PMI is placed in the scale A. It will be the most important thing to be consider about, if the PMI released by USA, since its currency, US$, is used in most of currencies pair in forex trading.
PMI is commonly used to forecast the PPI (Producer Price Index) which is released in the end of the month. We can take advantage from this PMI indicator, since the result is regularly released in the beginning of the month, before other inflation indicator is being released.
In the other hand, the PMI also has weakness points:
- Since the result is shown in three different levels: increase, decrease, or stagnant, it doesn’t represent a specific production levels.
- The PMI surveys don’t include the employment cost which is one of the biggest cost besides the raw cost and deliveries cost.
Happy trading in PAMM Investments !
Don’t forget to read this important article for PAMM trader
1. How to become a PAMM Trader
2. Understanding your Forex Trader Level as PAMM Trader