The Purchasing Managers Index (PMI) is a crucial and widely followed indicator of economic activity. The PMI reflects the percentage of purchasing managers surveyed in a given month, in a certain economic sector, that reported improved business conditions compared to the previous month.

The surveys are conducted and released by the Institute for Supply Management, a not-for-profit U.S.-based association formed for the benefit of the purchasing and supply management profession. The institute releases the PMI on the first business day of each month.

Data for the PMI are gathered via a survey of 400 purchasing managers in the manufacturing sector within five core disciplines: production; new customer orders; speed of supplier deliveries; and employment and inventory levels. For their answers, respondents can report better, same or worse conditions than previous months.

Within all of the five categories, the percentage of respondents that reported better conditions than the previous months is determined. The five percentages are multiplied by a weighing factor (the factors adding to 1) and are added.

Any reading of the PMI of over 50 is interpreted as a sign that the economy is expanding, whereas any reading below 50 points to an economic contraction.

Corporate decision-makers, investors, fund managers, market analysts and economists all watch the PMI and consider its monthly number in concert with other indicators, in an attempt to divine the health of the overall economy and the direction of the markets. A well-informed investor always considers crucial economic indicators, such as the PMI, when making investment decisions.

The financial markets consider the PMI as the best and most accurate indicator of factory production. The PMI also is used for determining inflationary pressures, which are of keen interest to investors. An unexpected or dramatic change in the PMI typically is a catalyst for market reaction.