PMI's 3-year low indicates pressure on manufacturing

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MarginSqueeze.jpgThe PMI’s decline to a level similar to September 2009 indicates that the manufacturing sector is under pressure from falling demand in export markets, said Andre Coetzee, MD of the Chartered Institute of Purchasing and Supply (CIPS) Africa.

Released on Monday, the seasonally adjusted Kagiso purchasing managers index (PMI) fell four index points in September to 46.2, from 50.2 in August.

The PMI was at 45.8 in September 2009, when "widespread strike activity" plagued the manufacturing sector, Bureau for Economic Research senior economist Hugo Pienaar has been reported as saying.

"Based on the PMI, the deterioration in the local manufacturing sector has been stark in recent months," said Coetzee.

The domestic PMI was now in line with trends seen in the manufacturing sectors of South Africa’s key trading partners. The official September PMI reading for China, released on Monday, is 49.8 and the initial reading for the European Union remains below 50.

Europe takes more than a quarter of South Africa’s manufactured exports.

The pullback did not bode well for actual factory sector output in the third quarter. Manufacturing production declined by 1% quarter on quarter, annualised, during the second quarter.

On a more positive note, the expected business conditions index gained 2.6 points to 55.5 during September following three consecutive months where purchasing managers downgraded their outlook for future business activity.

The somewhat more upbeat prospects were corroborated by the PMI leading indicator, which rose from 0.90 in August to just below 1 at 0.99. The leading indicator measures the ratio between new sales orders and inventories - any number below 1 indicates that inventories exceed the demand for manufactured goods, which normally does not bode well for factory sector production, said Coetzee.

Another important feature of the September PMI was that the price index increased further after the 8.2 index point jump recorded in August.

The price component rose by another 4.9 points to 75.8 - the highest level since January 2012.
Coetzee added that as expected, "The August increase to back above 50 for the PMI employment index proved to be short-lived. The index lost 4.5 index points to 46.5."

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