PMI shows dim outlook for manufacturers

The seasonally adjusted Kagiso Tiso Holdings PMI is a key leading indicator of activity in the manufacturing sector. It lost 0.8 index points in August to 50.2 index points from 51 in July.

An index level of below 50 represents contraction in the manufacturing sector‚ while a reading of more than 50 signifies expansion in activity.

Standard Bank economist Shireen Darmalingam said the latest Kagiso PMI reading was in line with the falling trend of global PMIs.

The eurozone's PMI‚ she said‚ had been contracting since August last year.

"We are especially interested in the development in the eurozone to determine the sustainability of a strong recovery in SA manufacturing‚" Darmalingam said.

She noted that they did not believe the current PMI numbers were a true reflection of the manufacturing sector‚ and that the sector was likely weaker than what the PMI currently showed.

Standard Bank did not see any growth in the eurozone in the next nine months‚ which does not bode well for the local manufacturing sector and economic growth.

The average PMI reading for the first two months of the third quarter was at 50.6‚ which was lower than the average levels achieved in the first (55.4) and second quarters (51.8) of this year.

As a result‚ Abdul Davids‚ head of research at Kagiso Asset Management‚ said that he expected the manufacturing sector to once again place a drag on overall GDP (gross domestic product) growth during the third quarter.

This following a 1% contraction in manufacturing production during the second quarter after it rose by 7.7% in the first quarter.

Investec Group economist Annabel Bishop suggested that while the PMI reading did not imply the economy was in danger of slipping into recession‚ it did suggest that economic growth was likely to remain below potential this year.

"If our expectation is correct‚ the implication of lower economic activity should increase expectations of further cuts by the SARB and support the short-end of the curve‚" said Rand Merchant Bank's global markets team in a research note.

Some key sub-components of the PMI were particularly worrying.

The PMI's new sales orders index continued to be volatile and lost 5.3 points‚ falling 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‚" Davids pointed out.

"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 was even lower at 49.6."

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 one for the fifth consecutive month.

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

After gaining nearly four points in July‚ the business activity index lost a negligible 0.2 points in August to remain steady at 50.6.

The rising oil price resulted in a sharp spike of 8.2 points in the price index‚ which was 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 announced that local fuel costs will rise by 93c per litre in the beginning of September‚" says Davids.

The employment index gained four points and rose to 51. While it would normally be encouraging and bode well for employment prospects if the employment index was above 50‚ Davids cautioned that too much should not be read into the improvement.

"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‚" Davids concluded.