In May 2011, the Kagiso PMI manufacturing index dropped to 55.1, compared with 56.4 in April and a recent high of 57.2 in March (seasonally adjusted). The index has been above the critical 50 point level for 7 consecutive months suggesting that manufacturing activity continues to expand; although the rate of expansion is expected to slow in Q2 2011 relative to the extremely high rate of growth recorded in Q1 2011.
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.
Most areas of the PMI moved lower in May, including the business activity index, suppliers performance, and new sales orders. More positively, although new sales orders declined in May, the index remained above 60, which is relatively high by historical standards. There was also a sharp improvement in the ‘expected business conditions’ index.
Unfortunately and crucially, the employment index remained below the key 50 index level at 48.7 and has been below 50 for 11 of the last 12 months, indicating that the manufacturing sector is struggling to create jobs despite the overall improvement in business conditions.
The prices paid component of the PMI eased to 80.0 from 82.9 in April and an extremely high 88.0 in March. Despite the fall-off in the index during May, at the current level of 80.0, the reading will continue to raise concerns about general upward trend on producer inflation.
There is normally a good relationship between the PMI reading and the SA manufacturing data. If the relationship holds (which would be the general expectation), then it would suggest that after a robust Q1 2011 performance, the rate of expansion in manufacturing activity could lose some momentum in Q2 2011.
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