German Manufacturing PMI is the indicator of the health of the manufacturing sector of the German economy. The index is calculated on a monthly basis. 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 Germany.
How to calculate the PMI?
Several hundred purchasing managers from all over the Germany complete monthly surveys to provide the Institute of Supply Management with timely data. 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?
Manufacturing is a barometer of the well-being of the German economy. European-wide and even global recessions can start with a contraction in the manufacturing sector. 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 manufacturing sector and the German economy as a whole. 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 EUR.
The PMI combines statistical data with confidence elements and therefore should be coupled with other indicators (PPI and GDP) for optimal results.
