Manufacturing index in shock decline

This is the first time the index has been below the key 50 level since October 2009, and is the fourth consecutive monthly decline. The market was expecting the index to rise to 52.8.

Similar to the US 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.

The disappointing PMI index reading for June 2010 reflected a fall-off in a number of sub-components including business activity, which fell from 49.0 to 45.2, and employment, which is now down at 45.9 from 47.4 in May and a high of 56.3 in April. More encouragingly, the new sales orders index remained fractionally above 50 at 50.4.

The analysis provided by the BER suggests that the build-up and start of the FIFA World Soccer Cup may have had some negative effect on the number of working hours and hence an impact on overall activity levels within the broad manufacturing sector. This would certainly be intuitively correct given the increase in absenteeism and leave days. Just how big an impact the World Cup is having on the manufacturing sector is not possible to conclude at this stage, but there would certainly be some fall-off in activity. Hopefully this fall-off in activity is more than compensated by a pick-up in activity within the retail, food service, transport and accommodation sectors.

The World Cup cannot really fully explain the current slump in the PMI readings.

Excluding the impact of the World Cup, there is probably an underlying fall-off in industrial activity given SA’s relatively sluggish export performance (especially given the difficulties in Europe) as well as an important normalisation of the inventory cycle. This would suggest that while industrial activity should improve a little after the World Cup is concluded, it is unlikely to quickly move back to the levels recorded in the early part of 2010.

There is normally a good relationship between the PMI reading and the SA manufacturing data. Unfortunately, this relationship would now suggest that after a solid enough performance in Q4 2009 and Q1 2010, manufacturing is likely to slump in Q2 and Q3 2010, negatively impacting the Q2/Q3 2010 estimate of GDP. Hopefully the positive impact from the World Cup on others key sectors of the economy will more than compensate.

_ Kevin Lings is an economist at Stanlib