PMI stands for ‘Purchasing Managers' index’ and is considered as an indicator of the economic health and investor sentiments about the manufacturing sector (there is services PMI as well).
In a PMI data, a reading above 50 indicates economic expansion, while a reading below 50 points shows contraction of economic activities. The PMI is constructed separately for manufacturing and services sector. But the manufacturing sector holds more importance.
How PMI is different from IIP
The popular index that measures growth in the industrial sector as far as India is concerned is the CSO prepared Index of Industrial Production. IIP shows the change in production volume in major industrial subsectors like manufacturing, mining and electricity. Similarly, the IIP also gives use based (capital goods, consumer goods etc) trends in industrial production. It covers broader industrial sector compared to PMI.
But compared volume based production indicator like the IIP, the PMI senses dynamic trends because of the variable it uses for the construction of the index.
For example, new orders under PMI show growth oriented positive trends and not just volume of past production that can be traced in an ordinary Index of Industrial Production. Inventory level shows recessionary or boom trends. Employment scenario is also sentimental indicator. Hence, the PMI is more dynamic compared to a standard industrial production index.
