Taiwan PMI is compiled by combining five diffusion indexes, including new orders, production, employment, inventories, and supplier deliveries. The economic implications of the respective indexes are as follows:
1. New Orders
New orders refer to changes in orders received the month the company is interviewed compared to the previous month. In general, companies commence production upon receiving orders, then input manpower and raw materials (i.e. hiring laborers, ordering from upstream suppliers), and finally lead to inventories. Therefore, new orders are said to be the most leading among the five indicators of PMI.
Production refers to changes in the output the month the company is interviewed compared to the previous month.
Employment refers to changes in the number of employees hired the month the company is interviewed compared to the previous month. In general, companies decide the amount of manpower needed depending on orders received and production status. Hence, employment is a lagging indicator among the five components of PMI.
4. Supplier Deliveries
Supplier deliveries refer to the lead-time of deliveries, which mainly reflect the current purchase environment being inclined towards the buyer or the seller market. In general, when the economy is booming, orders will increase, and companies’ lead-time will be extended (i.e. deliveries are slower); on the contrary, when the economy deteriorates, delivery time may be reduced (i.e. deliveries are speedier).
Increases or decreases in inventories usually possess two economic implications. First, when finished product sales fall short of company expectations, since more material is prepared than is actually needed for production, raw material inventories will increase. On the other hand, increases in inventories may be the result of companies’ optimism towards future economic situations. Therefore, they increase inventories to cope with greater production demand in the future. Hence, changes in this indicator should be complemented by observations of other composite indicators in order to truly grasp the economic implications reflected.