PMI climbing, but manufacturing levels still below pre-pandemic levels

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PMI_pandemic_levels_100.jpgFollowing a robust increase in August 2020, the Absa Purchasing Managers' Index (PMI) ticked up further to 58.3 index points in September. The shift to a lower lockdown level mid-month likely drove the further improvement in business conditions in the local manufacturing sector.

However, the Bureau for Economic Research (BER) cautioned that the fact that the level of the PMI is now above pre-pandemic levels does not directly translate to official manufacturing activity being back to pre-pandemic levels.

"Owing to the month-on-month comparison asked for in the PMI questionnaire, the high level merely means that conditions continue to improve (with more respondents reporting an increase in output, for example, instead of no change or a decline compared to the previous month). This can still be entirely consistent with the level of output remaining well below that recorded prior to the lockdown", said the BER.

Some respondents noted that conditions remain far from normal, although they are improving.

Encouragingly, purchasing managers remain optimistic about business conditions going forward. The index tracking expected business conditions in six months' time ticked up to 64.5 from 63.4 in August and a low of just 27.3 in April.

In order to gauge the implications of the PMI results for official production data, it is important to note the quarterly trend in the Business Activity Index.

Although the headline PMI also improved on a quarter-on-quarter basis, the increase in the business activity component is more pronounced and probably better reflects the pure output dynamics at this stage.

The Business Activity Index fell back slightly in September, but continued to signal a monthly expansion. Furthermore, important from a manufacturing gross domestic product (GDP) perspective, the index averaged 64.6 index points in Quarter 3, compared to only 37.6 in Quarter 2. This means that actual output is set to experience a solid quarter-on-quarter bounce. The sharp 7.6% month-on-month increase for actual manufacturing production in July supports this.

Another positive development was that the New Sales Orders Index stayed at an elevated level in September. As was the case in August, the shift to a lower lockdown level mid-month likely contributed to an uptick in demand (measured on a month-on-month basis). Some respondents mentioned that customer restocking boosted orders, although export sales softened somewhat.

The Employment Index rose for a second consecutive month. At 44.5 index points, it still points to lower employment, but suggests that the pace of retrenchments has slowed. Statistics South Africa's Quarterly Labour Force Survey showed that the sector lost 185 000 formal-sector jobs in Quarter 2.

The Supplier Deliveries Index fell to 60.9 index points in September. Although still elevated, this is the lowest level since February. It is important to explain that this sub-component is inverted. If goods are less readily available and purchasing performance worsens, this is normally a sign of increased demand for manufactured products. Therefore, such a situation actually lifts the index. However, currently, goods are still less readily available owing to supply chain disruptions caused by local and global production stoppages and other trade-related disturbances. Nevertheless, it is surprising to see supply chain disruptions remain such an issue on a month-on-month basis.

The Purchasing Price Index rose for a second month and reached its highest level since September 2019. The increase was despite a decline in the diesel price at the start of the month and the Rand exchange rate, on average, trading somewhat stronger in September compared to August. The diesel price decline in early October could alleviate some pressure on costs in October.

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