PMI suggests manufacturing may dampen GDP growth

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PMIAugust2012.jpgThe seasonally adjusted Kagiso Purchasing Managers Index (PMI) lost a marginal 0.8 index points in August and is now at a level of 50.2. This places the average PMI reading for the first two months of the third quarter at 50.6, which is lower than the average levels achieved the first (55.4) and second quarters (51.8) of 2012, says Abdul Davids, Head of Research at Kagiso Asset Management

Consequently, Davids expects the manufacturing sector to once again place a drag on overall GDP growth during the third quarter.

After gaining nearly 4 points in July, the Business Activity Index lost a negligible 0.2 points in August to remain steady at 50.6. The New Sales Orders Index, which continues to be quite volatile, lost 5.3 points and fell back below the 50 point mark to 46.9.

"Despite the monthly volatility, we are seeing a clear downward trend in the demand for factory goods. After averaging at a robust level of 60.6 during the first quarter, this Index declined to an average of 51.2 in the second quarter. The average for July and August is even lower at 49.6," Davids points out.

Purchasing managers continued to downscale their expectations, as reflected in the 1.1 point decline in the Expected Business Conditions Index to 52.9. According to Davids, the fairly downbeat outlook was also corroborated by the PMI Leading Indicator, which remained below 1 for the fifth consecutive month.

"This indicates that supply continues to exceed demand and this does not bode well for manufacturing sector production," he explains.

The rising oil price resulted in a sharp spike (8.2 points) in the Price Index, which is now at 70.9.

"Brent crude oil prices have been trading above US$110 per barrel for some time and the Department of Energy has raised the local fuel price by 93c per litre for this month," says Davids.

On a positive note, the Employment Index gained 4 points and rose to 51. However, Davids cautions that as was the case in May, too much should not be read into this. "The last time the Employment Index was above the 50 point mark for more than two consecutive months was between February and April 2010. Even more striking is that 2007 was the last time that it measured above 50 for more than three consecutive months," he concludes.

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