PMI unchanged as manufacturing struggles to gain traction

The seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) remained unchanged at 50.4 in May, indicating that the sector is struggling to gain any real momentum.

However, although the headline number was flat, the index’s two largest-weighted subcomponents (the new sales orders index and the business activity index) lost ground over the period as conditions in the manufacturing sector remain tough, said Abdul Davids, Head of Research at Kagiso Asset Management.

After gaining 1.7 points in April, the new sales orders index fell 2.6 points to 51.1. “This is largely due to depressed foreign demand, which appears to be outweighing the potential positive impact of the weaker rand,” said Davids.

He added that locally, this decline in demand is in-line with the current slowing trend in consumer spending.

The business activity index, which rebounded in April, declined by 1.6 points to 50.6. The overall PMI was supported by solid increases in the inventory and employment subcomponents. The inventory index rose by nearly eight points to 54.7, recovering most of the ground it lost in April. However, Davids is doubtful about the sustainability of this increase as demand for manufactured goods remains weak.

Despite a 5.1 point rise, the employment index (47.2) remains below the key 50-point mark. “The outcome of the current round of wage negotiations in a number of manufacturing subsectors will be an important factor in determining the outlook for employment growth in the second half of this year,” said Davids.

Following a brief respite in April, the price index gained 4.4 points to 82.4, signifying persistent cost pressures. According to Davids, sustained rand weakness may have contributed to the increase. He also points out that various data sources seem to suggest that the recent moderation in the Producer Price Index could reverse in the next few months.

Davids concludes that the outlook, albeit bleak, is quite mixed with the expected business conditions index posting its second consecutive gain. However, the PMI leading indicator declined and is once again below one, indicating that current inventories exceed demand.

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