PMI falls yet again

The Kagiso Purchasing Managers Index (PMI) — an indicator of factory production — declined for the third consecutive month in May, Kagiso Securities says.

“While the level of the index continues to indicate that the factory sector is expanding, the latest reading is the lowest since November 2009 and suggests that the pace of manufacturing production has eased in recent months,” Andre Coetzee, head of fixed income at Kagiso Securities, said.

The seasonally adjusted PMI fell in May by 4.1 index points to reach 51.1.

So far in the second quarter of 2010, the PMI had averaged 53.2 versus 56.5 in the first quarter. In terms of a quarterly average, the PMI reached a trough of 37.2 in the second quarter of 2009 — in other words the gain up to the first quarter of 2010 amounted to 19.3 index points.

“Globally there has been a lot of emphasis on the impact of inventories in helping to drive countries such as the US out of recession,” Coetzee said.

In the case of the South African PMI, the inventory index contributed 2.4 points (or 12.4 percent) to the trough to peak rise in the PMI.

The employment index added 2.9 points (15.4 percent), but the PMI rebound was driven by new sales orders (7 points) and the business activity index (6.3 points, or 33 percent).

“In terms of the SA PMI, the recovery was much more than just an inventory story — the quality of the rebound was high,” Coetzee said.

Unfortunately, the average PMI decline (3.4 points) between the first quarter of 2010 and the second quarter of 2010 to date had also been driven by the business activity index, which contributed 2.2 points (almost 65 percent) to the fall. “This does not bode well for actual factory production as measured by Stats SA,” Coetzee said.

“The latest (May) business activity decline may have been exaggerated by the Transnet labour action. "For that reason, and notwithstanding the risks that for example drawn-out European sovereign debt problems pose to the South African manufacturing sector, one should be cautious not to get carried away by the fairly negative tone of the May PMI data.”

The PMI expected business conditions index experienced another mild decline to 64.1 in May. Although remaining at a level well above 50, the long-term average for the index was 67.6. Furthermore, the PMI leading indicator (new sales orders minus inventories) moved from +5.6 in April to -3.4 during May.

Coetzee said the PMI price index gained four points to reach 67.8 in May, the highest level since December 2008 and indicated that the higher than expected Producer Price Inflation reading of 5.5 percent year-on-year in April 2010 may not have been a once-off occurrence.

After remaining above the crucial 50 mark between January and April 2010, the seasonally adjusted PMI employment index saw a big decline of almost nine index points in May to fall back below 50.

“As in the case of business activity, we would want to see another month or two worth of data before making a definitive call on factory job prospects,” Coetzee said.