Flash Eurozone Composite Purchasing Managers' Index

The Flash Eurozone Composite Purchasing Managers' Index (Flash Eurozone Composite PMI) is an early monthly indicator of private-sector business activity in the Eurozone. It is based on business surveys compiled by S&P Global, covering the manufacturing and services sectors and is published before the corresponding final PMI data.

The index is designed to provide an early indication of changes in business activity and economic conditions in the euro area.

A simplified representation is:

$\text{Business Surveys}\to \text{Flash Composite PMI}\to \text{Assessment of Private-Sector Activity}$

Composition

The Flash Eurozone Composite PMI combines information from the manufacturing and services sectors.

The composite measure is based principally on the Manufacturing PMI and the services business activity index. The manufacturing and services components are weighted according to their relative importance in the euro-area economy.

A simplified representation is:

$\text{Composite PMI}=w_m\text{Manufacturing Activity}+w_s\text{Services Activity}$

where $w_m$ and $w_s$ represent the respective sector weights.

The composite index is therefore intended to provide a broader measure of private-sector activity than either the manufacturing or services PMI individually.

Methodology

The PMI is based on monthly surveys of companies. Respondents report whether selected business conditions have increased, decreased, or remained unchanged compared with the previous month.

The resulting diffusion index can be represented as:

$\text{PMI}=\mathrm{\%}\text{Higher}+0.5\times \mathrm{\%}\text{Unchanged}$

The index is expressed on a scale from 0 to 100.

A reading above 50 indicates an increase in business activity compared with the previous month, while a reading below 50 indicates a decrease.

A reading of 50 indicates no overall change.

$\text{PMI}>50\to \text{Expansion}$

$\text{PMI}=50\to \text{No Change}$

$\text{PMI}<50\to \text{Contraction}$

The PMI is an index of the direction and relative strength of change rather than a percentage measure of economic growth.

Flash estimate

The flash PMI is an initial estimate of the corresponding final PMI. It is released before the complete survey results are available and is intended to provide an early indication of current economic conditions.

A simplified sequence is:

$\text{Partial Survey Responses}\to \text{Flash PMI}\to \text{Final PMI}$

The final PMI may differ from the flash estimate as additional survey responses become available.

Interpretation

The Flash Eurozone Composite PMI is primarily interpreted through its position relative to the 50-point threshold and through changes in the index over time.

For example, a movement from 48 to 52 can indicate a transition from contraction to expansion.

A simplified representation is:

${\text{PMI}}_t-{\text{PMI}}_{t-1}>0\to \text{Improving Business Conditions}$

However, an increase in the PMI does not necessarily mean that economic output has increased by the same percentage.

The level of the index and its direction of movement are therefore generally considered together.

Economic significance

The Flash Eurozone Composite PMI is closely monitored because it provides relatively timely information about economic activity before many official economic statistics become available.

It can provide information about developments in:

• business activity;
• new orders;
• employment;
• export orders;
• input prices;
• output prices;
• business expectations;
• inventories and purchasing activity.

A simplified relationship is:

$\text{PMI Data}\to \text{Assessment of Business Conditions}\to \text{Economic Growth Expectations}$

The index can therefore be used alongside other economic indicators when assessing the direction of the euro-area economy.

Relationship with GDP

The composite PMI can provide an indication of changes in economic activity and may be used as part of assessments of GDP growth.

A simplified relationship is:

$\text{Composite PMI}\to \text{Business Activity}\to \text{Economic Growth Assessment}$

The PMI should not, however, be interpreted as a direct measure of GDP.

A simplified distinction is:

$\text{PMI}\ne \text{GDP Growth Rate}$

The relationship between PMI readings and GDP growth can vary over time and across economic conditions.

Monetary policy relevance

The Flash Eurozone Composite PMI can influence expectations concerning monetary policy because changes in business activity can provide information about economic growth, demand, employment, and price pressures.

A simplified transmission mechanism is:

$\text{PMI}\to \text{Growth and Inflation Assessment}\to \text{Monetary-Policy Expectations}$

The indicator can therefore be considered alongside inflation, employment, wages, credit conditions, financial-market data, and other economic indicators when assessing the outlook for the European Central Bank's monetary policy.

Business activity and employment

Changes in business activity reported in the PMI surveys can be accompanied by changes in employment intentions and actual employment.

A simplified relationship is:

$\text{Changes in Business Activity}\to \text{Changes in Labour Demand}\to \text{Employment Conditions}$

The relationship is not necessarily immediate because companies may adjust working hours, inventories, productivity, or capacity utilization before changing employment levels.

Prices and inflation

The PMI surveys also provide information about changes in input costs and prices charged by businesses.

A simplified transmission mechanism is:

$\text{Higher Input Costs}\to \text{Higher Business Costs}\to \text{Potential Price Increases}\to \text{Inflationary Pressure}$

The PMI price indicators therefore provide information about business-level price pressures, although they are not a substitute for official measures of consumer or producer price inflation.

Limitations

The Flash Eurozone Composite PMI has several limitations.

It is a survey-based indicator and therefore reflects the responses and perceptions of participating businesses. It is also a preliminary measure and can be revised when additional survey responses become available.

Other limitations include:

• the PMI does not directly measure economic output;
• the 50-point threshold does not represent a specific percentage rate of GDP growth;
• sectoral developments may differ substantially from the composite reading;
• survey responses can be affected by temporary events and changes in business sentiment;
• the relationship between PMI readings and official economic statistics can vary over time.

A simplified distinction is:

$\text{PMI Signal}\ne \text{Complete Measure of Economic Activity}$

The indicator is therefore most useful when considered together with other economic and financial data.

See also

• Purchasing Managers' Index
• Manufacturing PMI
• Services PMI
• Eurozone
• European Central Bank
• Gross domestic product
• Economic indicator
• Leading indicator
• Macroeconomics