PMI declines for third consecutive month - tracks lower global factory sector

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PMI decline July 2011.jpgThe seasonally adjusted Kagiso PMI declined for a third consecutive month in June, and at 53.9 index points reached the worst level so far in 2011. Although the level of the index suggests that the manufacturing sector is expanding, it also signals a moderation in the sector’s growth momentum. The recent trend for the SA PMI is in line with global factory sector developments, the kagiso website reports.

Both the current activity and forward looking indicators lost some momentum in June. The business activity and new sales orders indices lost ground, while purchasing managers were also less optimistic about future business conditions. New sales orders, the largest weighted PMI category, declined by 3 index points to a still robust 58 index points, whereas business activity gave up 1.6 points to 55.2.

The global PMI peaked at 57.4 in February 2011 and has since declined to 52.9 during May. Albeit with a couple of month’s lag, the SA manufacturing production cycle closely tracks international factory sector developments. Given that the recent loss of global momentum (driven by the impact of the previous strong rise in commodity prices such as oil and the Japanese disaster in March) will in all likelihood prove to be transitory, the declines for the SA PMI should also stabilize in the not too distant future. However, because of the lag between SA and global trends, the domestic PMI could see another month or two of declines before a re-acceleration takes hold.

The most concerning part of the SA manufacturing story remains the employment situation. The PMI employment index remained stuck below the key level of 50 index points in June and declined slightly (by 1 index point) to 47.7. With the exception of February 2011, the PMI employment index has been below 50 for every month since May 2010. While there could be a number of reasons for this (including caution in light of lingering concerns about the health of the global economy, high domestic wage increases through the recession and the low cost of capital/ strong rand that may be encouraging mechanisation), the choppy nature of the SA manufacturing recovery may also be part of the story. The graph on the right plots the monthly PMI versus the actual y-o-y Stats SA manufacturing production numbers since end 2009, i.e. shortly after SA exited the 2008/09 recession. One can almost say that the PMI has experienced a “boom-bust recovery” with an initial strong rebound (PMI reached 58.7 in February 2010) followed by a declining trend to 48.6 in September 2010. Then we saw another robust recovery to 57.2 by March 2011, only to be followed by the recent (moderate to date) easing trend. The nature of the recovery since end 2009 may help explain the hesitancy to employ more people.

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