In August 2011, the Kagiso PMI manufacturing index rose to 46.7, compared with 44.2 in July. The August outcome was in-line with market expectations.
The August data point is a welcome improvement relative to the shock reading in July, but the index remains below the critical 50 index level, signalling that manufacturing activity continues to contract. It is also concerning to see that the forward looking components of the index (especially New Sales Orders and Expected Business Conditions), fell further during the month.
Overall, the manufacturing sector has been losing momentum for a number of months (the weakness is not just strike related or only related to the motor industry) and was clearly a drag on the economy in Q2 2011 (see our recent note on the SA Q2 GDP outcome).
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 some of the sub-components of the PMI, there are a number of concerns worth highlighting. Although there was a welcome improvement in the Business Activity index, it remains below 50 at 46.6. As mentioned above, the New Sales Orders Index fell a further 4.2 index points to 44.6, which is the lowest reading since August 2009 and very concerning.
The Employment index improved to 43.1 from 39.1 in July, but at 43.1 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 6 consecutive months.
The Prices Paid component of the PMI rose fractionally to 75.2 from 75.0 in July, highlighting some ongoing concerns about the general upward trend in producer inflation.
While the industrial strike activity in July was largely blamed for the sharp decline in the PMI reading during the month, it is clear from the August data that industrial activity has been softening for a number of months, suggesting a broader slowdown in SA industrial 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, after a very weak outcome in Q2 2011. 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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