Ivey PMI measures the activity of the major Canadian purchasing managers. The index is calculated monthly by the Purchasing Management Association of Canada and the Richard Ivey School of Business. The main purpose of the PMI is to provide key decision makers — company owners and managers — with adequate and up-to-date information on business conditions in Canada.
How to calculate the PMI?
Several hundred purchasing managers from all over the country complete monthly surveys to provide the researchers with up-to-date information. The index is based on five major indictors, which are new orders, inventory levels, production, supplier deliveries and employment environment. The weights of indicators are different and range from 0.1 to 0.3.
Why is it important?
Ivey PMI is meant to be the barometer of the Canadian economy. When the purchasing managers feel insecure about business condition and note a contraction in their purchasing activity, it is a possibly sign of an upcoming recession. That’s why the PMI is closely monitored by the experts.
How to read the indicator?
The PMI value fluctuates between 0 and 100. A PMI reading above 50 represents expansion of the manufacturing sector, below 50 — a contraction. If the manufacturing is expanding, the general economy is expected to do the same and vice versa. The PMI of 50 apparently indicates no change.
The rate of change is also important. A MoM decrease in reading from 58 to 52 would be perceived negatively by the market. Why? Because the growth is slowing down, bringing uncertainty and opening the gates for a potential recession.
Practical application
With the help of the PMI the investor can predict the well-being of the Canadian economy in the upcoming periods of time. Knowing when the market turns bearish is of great importance to any trader. A higher than expected reading should be taken as positive for the CAD, a lower than expected reading should be taken as negative for the CAD.
The PMI combines statistical data with confidence elements and therefore should be coupled with other indicators (PPI and GDP) for optimal results.
