PMI stabilises as underlying indicators show mixed results

The seasonally adjusted Kagiso Purchasing Managers Index (PMI) remained relatively stable at 53.6 in May 2012 compared to 53.7 in the previous month.

However, despite the largely unchanged headline reading, some significant developments were seen within a number of the main PMI sub-components, said Abdul Davids, Head of Research at Kagiso Asset Management.

A key development was the 4.2 point rise in the Employment Index, which is now at 53. “This is the first time since February 2011 that this Index has risen above the 50 point mark to signal employment expansion in the manufacturing industry,” says Davids. He comments that this result may be a delayed reaction to the robust business activity levels seen thus far in 2012.

However, he cautions that the positive move in the Employment Index “may not be sustainable in the coming months as some of the other major PMI sub-components are hinting at a slowdown in manufacturing sector growth.”

The New Sales Orders Index declined by 3.7 index points to reach 51.7 in May. “This marks the third consecutive month that the Index has declined by 3.5 or more points and reflects a rapid deterioration in demand for locally-produced goods,” says Davids. In addition, the Business Activity Index declined to 56 after averaging at around 58 during the first quarter of 2012.

After moderating for four consecutive months, the Price Index rose by 2.5 index points to 73.6. “This rise is mainly due to the weaker rand since April as the oil price, which posed the largest upside risk to input costs, declined significantly during the month,” explains Davids. According to him, the 2.8 point rise in the Expected Business Conditions Index may also be driven by the weaker rand, which may have boosted manufacturers’ expectations around the competitiveness of locally-produced goods on international markets.

These upbeat expectations were not supported by the PMI leading indicator (new sales orders as a ratio of inventories), which fell to its lowest level since early 2009 (0.84). “This means that inventories are too high relative to the demand for manufactured goods and suggests a possible further easing in headline PMI in the coming months,” says Davids.

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