PMI and its sub-components improved in July but sustainability is in question

The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) measured 52.1 index points in July 2019, up from 46.2 index points in June 2019. This is the first reading above the neutral 50-point mark since December 2018.

“The improvement is well-supported by the underlying sub-components, with four of the major five sub-components coming in above the neutral 50-point mark, signalling an expansion in activity”, said the Bureau for Economic Research (BER).

“However, given growing concerns about the health of the global manufacturing sector, it remains to be seen whether this improvement can be sustained going forward”, noted BER.

While purchasing managers continue to expect conditions to improve in six months’ time, they are less optimistic than before. The index tracking expected business conditions declined to 54.5 index points in July, down from 62.3 index points just two months before and more than 12 points below the level recorded at the start of 2019.

In July, the New Sales Orders Index climbed to 54.5 index points and is now almost 10 points above the level recorded in May. The fact that the index rose for a second consecutive month is encouraging, however, the sustainability of the improvement remains in question.

The reported improvement in demand is the likely contributor to a rise in business activity. The Business Activity Index surged higher in July, far surpassing the neutral 50-point mark. It must be noted that the index can be volatile and might drop lower again in the next month as some firms may have temporarily ramped up production ahead of possible strike-related production disruptions amid wage negotiations. “Should this be the case, the improvement is unlikely to be repeated”, explained BER.

The Purchasing Inventories Index also edged back to reach 50.9 points after averaging 42.5 points in the preceding three months. It is unclear as to the catalyst for said increase. It may be that a number of manufacturing firms in, or supplying to, sectors that are busy with wage negotiations (for example, automotive and platinum mining) increased output or saw increased demand for their products in July to guard against possible strike-related production disruptions. Should this be the case, similar to the Business Activity Index, the notable upward moves in July are unlikely to be repeated.

Unfortunately, job prospects remained bleak with the Employment Index only ticking up to 43.1 index points, thus remaining in deep negative terrain.

The index tracking purchasing prices erased most of last month’s gain and fell back to 67.9 index points in July. Barring May’s reading of 67.7 points, this is the lowest level since May 2018. The stronger Rand exchange rate (on average) may have supported the decline in the index.