One way to gauge how well the economy in a country is doing is to call the Chief Executive Officer of every large company and ask “how’s business?”. To save you time there are surveys that effectively do that. They don’t actually phone the chief exec, instead a survey is sent to the person at the company who is responsible for buying or selling goods and services. They are given a standard set of questions on the company’s output, the number of new orders, the prices of goods and services they buy and sell and their level of employment.
The questions are of the form: will this get worse, remain the same or improve. Then this is converted into a number according to the good/same/worse responses. If everyone in the survey said they expect the number of employees to increase the PMI would be 100%, if everyone expected employment to fall the PMI would be 0%. That’s why 50% is the turning point: if the PMI is above 50 it shows improvement, and below 50 is deterioration.
The number is aggregated for all companies, seasonally adjusted using some statistical voodoo called X12, and then published. The main surveys are conducted by Markit, the Ifo Institute for Economic Research in Germany which produces the German Ifo PMI, the Bank of Japan which produces the Tankan survey, and Caixin which produces a Chinese PMI in collaboration with Markit. PMI is closely watched because it is a leading indicator of economic growth which affects corporate earnings and, in turn, share and bond prices.