In January 2012, the Kagiso PMI manufacturing index rose more than expected to 53.2, compared with a disappointing 49.4 in December 2011. The January outcome was well above market expectations, which was for the index to rise marginally to 50.2.
The January data is a welcome respite after six months of disappointing PMI data - the PMI data has, in general, been weak since the July 2011, dropping below the key 50 index level on a number of occasions.
It is particularly encouraging to see that the key forward looking component of the PMI index (namely New Sales Orders), jumped by a massive 9.0 index points to 57.3. This follows a decline of 3.0 index points in December 2011. It will be crucial to see if this type of improvement is sustained,
Given the volatility of the manufacturing data (see discussion below), more than one month’s improvement in the index is required in order to raise expectations. Unsurprisingly, the employment index remained well below the key 50 index level at 45.2. This is the eleventh consecutive month in-which the employment index has been below 50.
The Prices Paid component of the PMI eased to 81.4 from 83.3 in December, highlighting that although PPI inflation fell to below 10%y/y in December, manufacturers are still experiencing fairly significant cost pressure (see chart attached).
Similar to the ISM manufacturing survey, an index level above 50 signals expansion, while a reading below 50 indicates contraction. It is clear from the charts attached that the PMI index is relatively volatile from month-to-month. In addition, the index has a relatively short history. However, despite these limitations the index has become an important gauge of manufacturing activity.
In recent months, there had emerged a fairly significant divergence between the actual manufacturing data and the PMI readings. The latest PMI reading closes some of that discrepancy. Nevertheless, the large change in the PMI, over a one-month period, raises concerns about the survey process. Equally, both the monthly as well as the annual rate of change in Stats SA manufacturing data has been extremely volatile for a considerable period, with a substantial divergence in performance at sector or industry level. Simply stated, SA’s aggregated manufacturing data just seems far too volatile.
One way to judge this is to simply look at the employment PMI reading over time (see chart attached). This reading would suggest that tens of thousands of people are being hired and fired on a monthly basis. Manufacturing businesses simply don’t operate with that degree of volatility in their labour force – especially considering that the data is supposed to be seasonally adjusted.
Given the volatility in the data, it is perhaps useful to look at the trend cycle index for manufacturing, which clearly shows that although SA manufacturing has recovered from the 2008/2009 severe recession, it has being stagnating for the past year and remains under pressure. The performance of manufacturing has certainly not kept pace with the performance of the retail sector. Instead it has been negatively impacted by a range of factors including higher import demand (helped by the strong currency), a relatively poor performance in the domestic mining and agricultural sectors, a slump in construction activity as well as a general lack of fixed investment spending.
For 2010 as a whole SA manufacturing activity grew by 4.8%y/y, which was obviously a vast improvement on the 13.4%y/y decline recorded in 2009. In 2011, production appears to have averaged an annual growth rate of around only 2.5%. While we still expect the manufacturing sector to maintain a reasonable growth rate in 2012, it will struggle to gain any real momentum without an improvement in the global economy and/or a revitalisation of the domestic economy in the form of increased investment activity and employment growth.
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