Recently, I read news on Economic times that publishes, HSBC India Manufacturing Purchasing Managers’ Index declined to 56.5 in November, compared with 57.5 the previous month. So I thought lets dig deep into this macroeconomic event today.
HSBC India Manufacturing Purchasing Managers’ Index (PMI)
The HSBC India Manufacturing Purchasing Managers’ Index (PMI) is an economic indicator that measures the activity level of the manufacturing sector in India. It measures the month-on-month change in the combined output of India’s manufacturing It. Although HSBC sponsored the PMI in the past, as of recent years, the S&P Global India Manufacturing PMI (formerly IHS Markit PMI) is widely followed.
What is the Manufacturing PMI?
- Definition: PMI is a survey-based measure that reflects the performance and health of the manufacturing sector. It is derived from responses of purchasing managers across various companies in the manufacturing industry.
- Key Focus Areas: The survey assesses new orders, production, supplier delivery times, employment, and inventories.
- Score Range: The PMI score ranges between 0 and 100.
How to Interpret the PMI Reading?
The PMI reading provides insight into the current business conditions in the manufacturing sector. It is an important leading indicator of economic performance.
- 50-Level Benchmark:
- Above 50: Indicates expansion in manufacturing activity.
- Below 50: Indicates contraction in manufacturing activity.
- Exactly 50: Indicates no change (neutral) How to Read the Changes
PMI Reading of 55:
- Indicates strong expansion in manufacturing activity.
- Suggests rising demand for goods, potential job creation, and overall economic growth.
- Positive for equity markets, particularly manufacturing, industrials, and consumer discretionary stocks.
PMI Reading of 45:
- Indicates contraction in manufacturing activity.
- Suggests reduced demand, slower production, and potentially rising unemployment.
- Negative for stock markets, as it signals economic weakness.
Components of the PMI
The PMI is a weighted average of the following key sub-indices:
- New Orders: Tracks demand conditions in the economy.
- Production Output: Measures actual manufacturing production.
- Employment Levels: Indicates changes in hiring or layoffs.
- Supplier Delivery Times: Tracks the speed of supply chain operations (inverted in calculation).
- Stock of Purchases: Reflects inventory levels.
Limitations of PMI
- Sector-Specific: PMI focuses only on the manufacturing sector and does not reflect the performance of the services sector, which is a significant part of the Indian economy.
- Subjective: It is survey-based and relies on the opinions of purchasing managers, which can introduce bias or subjectivity.
- Short-Term Focus: PMI is a high-frequency indicator and provides only a short-term view of economic conditions.
The Manufacturing PMI is an important indicator to gauge the health of the manufacturing sector and overall economic activity. A strong PMI reading generally boosts investor confidence, signaling economic expansion and benefiting the stock market. However, a weak PMI reading may lead to concerns about economic slowdown, potentially causing stock market corrections.
