PMI Data Still Shows Contraction, But Slightly Better-Than-Expected
Manufacturing PMI for December 2024 came in at 49.30. Anything below 50 shows contraction in the manufacturing sector. However, 49.30 was up slightly from the previous month and better-than-expected.
Manufacturing continues to be a concern to economists as it is one of the few negatives for the U.S. economy. Keep it on watch.
Let's explore how manufacturing PMI is calculated.
The U.S. Manufacturing Purchasing Managers' Index (PMI) is a key economic indicator that provides insight into the health and direction of the manufacturing sector in the United States. It is a survey-based measure that asks manufacturing purchasing managers about various aspects of their business, including production levels, new orders, employment, supplier deliveries, and inventories.
How is it calculated?
The PMI is calculated based on the responses to the survey questions. Each question has three possible answers:
- Better: Conditions have improved compared to the previous month.
- Same: Conditions have remained unchanged.
- Worse: Conditions have deteriorated.
The percentage of respondents reporting "better" is multiplied by 1, the percentage reporting "same" is multiplied by 0.5, and the percentage reporting "worse" is multiplied by 0. These weighted figures are then summed for each of the five key components: new orders, production, employment, supplier deliveries, and inventories.
The formula for PMI is:
PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)
Where:
- P1 = Percentage of respondents reporting improvement
- P2 = Percentage of respondents reporting no change
- P3 = Percentage of respondents reporting deterioration
The PMI ranges from 0 to 100, with a reading above 50 indicating overall growth or expansion in the manufacturing sector compared to the previous month. A reading below 50 suggests contraction.
Key Points:
- The ISM Manufacturing PMI is a widely followed economic indicator.
- It is released on the first business day of every month by the Institute for Supply Management (ISM).
- The PMI can be used to track the overall health of the manufacturing sector and to identify potential turning points in the economy.
In summary, the U.S. Manufacturing PMI is a valuable tool for assessing the current state and future prospects of the manufacturing sector, which plays a significant role in the overall U.S. economy.
