In September 2011, the Kagiso PMI manufacturing index rose to 50.7, compared with 46.7 in August and the shocking 44.2 recorded in July. The September outcome was above market expectations for the index to fall-back to 46.2.
The September data is a welcome improvement relative to the weak reading in August and the shock reading in July, but at 50.7 the index remains fairly subdued and not indicative of a growing industrial base that is able to create jobs. It is particularly concerning to see that a key forward looking component of the index (namely New Sales Orders), remains below 50 for the third consecutive month.
In contrast, the expected business conditions index jumped sharply to 60.8 from 53.7 in August. Overall, the manufacturing sector has clearly lost momentum over the past 6 months, but at least the loss of momentum was contained in September.
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.
Looking at the sub-components of the PMI, there are a number of key areas of improvement worth highlighting. The Business Activity index rose to 53.4 from 46.6 in August, the Backlog of Sales Orders improved to 45.7 from 38.1 last month and the Purchasing Commitments Index jumped to 54.3 from 45.0. There was also a sharp rise in Inventories to 57.4 from 52.2 previously. Crucially, although the Employment Index improved fractionally to 43.8 from 43.1 in August, at 43.8 the component remains very weak, suggesting that the manufacturing sector continues to cut-back on employment. The employment index has now been below 50 for the past 7 consecutive months. The Prices Paid component of the PMI eased fractionally to 73.9 from 75.2 in August, highlighting some ongoing concerns about the general upward trend in producer inflation.
Strike activity in the industrial and mining sectors heavily disrupted the manufacturing sector during the middle of the year; and hence, in comparison, the latest PMI reading reflects a welcome improvement. However, while the latest PMI reading is a little more encouraging, at 50.7 the index is well below the average for the first five months of the year, which was 55.6. This indicates that manufacturing activity has been losing momentum for a number of months, exaggerated by the mid-year strike activity.
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), it indicates that manufacturing has remained under pressure in Q3 2011 with only modest signs of improvement post the barrage of strikes. This supports our most recent decision to revise down SA’s GDP growth forecast for 2011. Risks remain to the downside.
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