How does PMI relate to GDP growth?

Purchasing Managers' Indexes (PMIs) are diffusion indexes based on monthly surveys of private sector companies, covering new orders, output, employment, delivery times, and inventories. Published by S&P Global (formerly IHS Markit) and the Institute for Supply Management (ISM), PMIs provide the most timely read on economic momentum because they are released on the first business day of each month, weeks before hard economic data.

PMIs above 50 indicate that more firms are reporting expansion than contraction; below 50 signals net contraction. Historically, the ISM Manufacturing PMI has shown a strong correlation with GDP growth: sustained readings above 50 are associated with positive GDP growth, while sustained readings below 43-44 have aligned with every US recession since the 1960s. The manufacturing PMI tends to lead GDP by one to two quarters because manufacturing orders precede production, which precedes shipment and revenue recognition in GDP accounting.

The services PMI has gained importance as the US economy has shifted from manufacturing (roughly 11% of GDP) to services (roughly 77% of GDP). A manufacturing PMI in contraction does not necessarily mean the overall economy is contracting if the much larger services sector remains expansionary. The composite PMI, which weights manufacturing and services by their GDP shares, provides the most comprehensive read. However, manufacturing PMIs still carry outsized market impact because manufacturing is more cyclically sensitive and leads turning points.

Translating PMIs to GDP growth is imprecise but follows rough guidelines: ISM Manufacturing readings of 50 correspond to roughly 2.5% annualized GDP growth (because the broader economy can grow even as manufacturing stagnates), readings of 55 map to roughly 4%, and readings of 45 map to roughly 0-1%. These translations are approximate and shift over time as the manufacturing share of GDP evolves. PMIs are most valuable at turning points, when their directional signal is more reliable than their precise level.