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PMI - Explained in Layman Language

What is PMI?

To understand how the economy works, we have different kinds of metrics like the Index of Industrial Production (IIP) or Gross Domestic Product (GDP). IIP calculates the growth in factory output; GDP measures the size of the economy. Similarly, we have the PMI data that gauges the growth in demand. It does so by evaluating business activity and planned purchases of goods and services. The PMI data is announced separately for manufacturing and services sectors, and is reported as a double-digit figure. Any figure above 50 reflects growth in activity. Consequently, a sub-50 reading denotes a contraction or a fall in activity.

What this means

Higher the figure, greater is the expansion. This means, businesses are getting more fresh orders. PMI thus reflects an improvement in demand, and consequently, the economy. But, as with any other economic data, only a consistent reading will help understand macroeconomic conditions.

 Indian PMI

Manufacturing PMI for October stood at 49.6, the same as September. It has been below 50-levels since August. Services PMI, meanwhile, improved marginally to 47.1 from the over four-year low of 44.6 in September.

 Reading the fine-print

The PMI survey takes into account factors like new orders, outlook for future, employment and production output. Data for October suggests that while there is a marginal pick-up in orders, some stress factors remain like high input price, inventory levels or order backlog.

Input price index and inventory pile-up

High input costs reduce a company’s profitability. This rose to a 16-month high of 64.5 in October despite an appreciation in the rupee in September, according to a Business Standard report. This shows that the industry faces broad-based pressure on pricing. This could also force companies to hike prices to maintain profitability, which could further impact demand. Inventories are the goods that factories produce well in advance of sales. Companies build inventories to make sure goods are available in plenty. However, too much increase will lead to a fall in production until the goods are sold. This also reflects slower demand. Inventories, when compared to new orders, rose to the highest levels since January 2009, the report said. This suggests that manufacturing output could fall going forward.

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