Objective Weighting Schemes for Computing the Purchasing Managers ’ Index

The present paper investigates the choice of objective weighting schemes for computing the Purchasing Managers’ Index (PMI). To this end, the principal components variable selection strategy considered by Jolliffee (1972, 1973) is applied to monthly data of five key diffusion indexes for the period from January 1948 to October 2004, compiled by the Institute for Supply Management (ISM). It turns out that a simpler PMI based solely on the employment diffusion index, one of the five key PMI indicators, can be computed without loss of too much information. Also, our results do not support the ISM’s current practice of assigning different weights to the five diffusion indexes (i.e., the highest weight to the new orders diffusion index and the lowest one to the inventory diffusion index).