"With the exception of the inventory index, the other key sub-indices used in the calculation of the headline PMI all lost ground in May. The biggest disappointment was factory job market developments with the employment index declining by 8.9 points to fall below the key 50 mark for the first time in 2010.

"Also concerning is the fact that the seasonally adjusted business activity index, which most closely tracks actual manufacturing output, eased for the third month in succession to 49.0, i.e. a level that indicates that the growth in factory production ground to a halt in May. While the May data raise some red flags about the manufacturing sector outlook, it may just be that the Transnet strike that hit the economy in the second half of the month can to a degree help explain the weaker figures.

"Having said that, the unadjusted business activity index actually rose slightly (by 0.5 index points) to 48.6, which at first glance raises some doubt about the impact of the strike. However, history suggests that the average rise in the (unadjusted) business activity index during May [1] is four times (2.25 points) the gain posted in May 2010. Even measured in this way, there may be some evidence that the Transnet labour action could have had a once-off adverse impact on the latest numbers.

The PMI Report for May can be accessed here...

André Coetzee, Kagiso Securities
Tel: (011) 341 3240

Hugo Pienaar, Bureau for Economic Research
Tel: (021) 887 2810

1 June 2010