What the PMI Report for CFOs Means for You
The Manufacturing PMI report is a monthly report of benchmarks that measure the manufacturing sector’s performance. Data is collected via surveys of supply executives from a wide range of industries. A series of indices take readings in specific areas, including new orders, order backlogs, production, employment, prices, and supplier deliveries.
These numbers are then used to generate an overall manufacturing benchmark known as the PMI, which is expressed as a percentage. Several different organizations publish a monthly PMI report, but the gold standard for the American market is released by the ISM (Institute for Supply Management).
The PMI report is a reflection of macroeconomic factors and can be used to give an accurate picture of how the overall economy is performing. According to the ISM, a PMI of over 50% indicates expansion in the manufacturing sector, while a score below 50% means the manufacturing sector is slowing down. At a higher level, when PMI remains above 48.7% for some time, this is a strong indicator that the overall economy or GDP (Gross Domestic Product) is generally expanding. Conversely, if the Manufacturing PMI remains below 48.7%, it signals declining economic growth.
The PMI report is an essential tool for CFOs who are trying to read the tea leaves in terms of what to expect for upcoming quarters. It provides leading indicators that CFOs can work with to be strategic in their planning.
February PMI Report
ISM recently published its February Manufacturing PMI report. It shows that the manufacturing sector is booming, and the U.S. economy is in growth mode. The Manufacturing PMI hit 58.6% for the month, up a full percentage point over January’s reading. According to ISM:
“The Manufacturing PMI® continued to indicate strong sector expansion and U.S. economic growth in February. All five subindexes that directly factor into the Manufacturing PMI® were in growth territory. All of the six biggest manufacturing industries expanded…”
This marks 21 straight months of overall economic expansion following the contraction measured in April and May 2020 (more on that shortly).
There are some interesting details from the February PMI report that should definitely be catching the attention of CFOs and strategy makers. The New Orders Index grew 3.8% for the month to hit 61.7%, indicating new orders are growing at a high rate. In fact, ISM says all six of the largest manufacturing sectors (Transportation Equipment; Computer & Electronic Products; Petroleum & Coal Products; Chemical Products; Machinery; and Food, Beverage & Tobacco Products) saw their orders increase at moderate to strong levels.
A strategic CFO will be looking at these indicators and applying the trends to their business.
Maybe they need to increase the order frequency from suppliers to keep up with demand. Perhaps it’s time to revisit supply chain resiliency to ensure shortages don’t shut down production just when demand is exploding. It could be time to get strategic about suppliers. With that level of demand, this would be a good time to lock down future supply.
Historical PMI Report Shows How Quickly the Situation Degenerated in 2020
February’s Manufacturing PMI report shows a U.S. economy that is in strong growth mode. Historically, the Manufacturing PMI report provides a clear picture of what was happening at that snapshot in time. On the other hand, ISM’s April 2020 PMI shows how badly the COVID pandemic was hammering the manufacturing sector.
As a refresher, on January 21, 2020, the first confirmed American COVID case was reported. On February 3, 2020, the U.S. declared the outbreak to be a public health emergency. And on March 11, 2020, the World Health Organization announced COVID-19 as a global epidemic.
By April, the pandemic was wreaking havoc on the manufacturing sector. ISM’s April 2020 PMI was at 41.5%. That was down 7.6% from the March report, and it marked a contraction in the U.S. economy—an ominous sign after 131 consecutive months of expansion. Breaking down the various indices that make up the PMI report showed more detail that would prove invaluable to CFOs who used the information proactively.
Among the details, ISM noted that the inventory of raw materials was contracting, exports and imports were contracting, and customers’ inventories were too low. ISM noted:
“The PMI® indicates a level of manufacturing-sector contraction not seen since April 2009, with a strongly negative trajectory.”
The PMI report proved to be prescient, as supply chain disruptions roiled many industries and demand outstripped supply for many products. CFOs who acted on that PMI report took strategic measures to mitigate the worst of the impact. These included stockpiling raw materials and locking in transportation contracts.
Turnaround Can Happen Quickly: CFOs Need to Have Predictive Capability to Shift Quickly
What’s the lesson from these two Manufacturing PMI reports? Change can happen dramatically in the manufacturing sector. However, more commonly, it is a multi-month trend that can be tracked and used in projections as a leading indicator.
CFOs need to leverage the PMI report. They also need to act strategically based on those leading indicators, and that’s where Arkestro comes into the picture. Arkestro provides the ability for a CFO to have full visibility into the three key areas of business impact:
- Influencing more spend
- Driving more predictable cost savings
- Delivering accelerated improvement on supplier partnerships
- Influencing more spend
Using Arkestro, the CFO can simulate outcomes and align their strategy with the market conditions the PMI is signaling.
With a little bit of forward-thinking planning becomes much easier. But, even when planning fails, Arkestro’s predictive procurement platform will ring the alarm bells for you. Get a demo today and let us show you how you can stay on top of market changes.