Weel 6 Seville & Somers Topic 8, Exploration 12

The Purchaser Managers Index measures different activities that has an influence on how manufacturing companies do business. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

To gather information, the Institute for Supply Management, or ISM, contacts more than 300 executives responsible for making purchasing and supply-related decisions. The monthly survey obtains information about new product orders, exports and imports of materials and products, inventory levels, current prices, levels of employment, response times for getting supplies, and changes in overall production. The survey also gets general impressions of business conditions, with participants limited to three responses: better, worse, or unchanged. Respondents are also encouraged to list important commodities that have risen or fallen in price or are in short supply.

Once the institute collects all of its data, it consolidates the information into five general categories: new orders, production, employment, supplier deliveries, and inventories. For each of the categories, the ISM creates a diffusion index that can range between 0 and 100; the index is calculated by taking the percentage of respondents reporting better conditions and adding in one-half of the percentage of respondents reporting unchanged conditions. Therefore, a reading of 100 would indicate that all respondents reported better conditions; a reading of 50 indicates equal numbers of respondents reporting better and worse conditions.

The ISM then applies seasonal adjustments that are provided by the Commerce Department to account for normal monthly conditions. To calculate the PMI, the institute takes each of the five category indexes and weights them: 30% for new orders, 25% for production, 20% for employment, 15% for supplier deliveries, and 10% for inventories. The resulting composite index is the headline number that you read about...