In December 2011, the Kagiso PMI manufacturing index fell to 49.4, compared with 51.6 in November. The December outcome was below market expectations, which was for the index to remain unchanged.
The December data is very disappointing and suggests that SA manufacturing activity remains under enormous pressure, despite the improvement in the November manufacturing data, as reported by Stats SA. It is particularly concerning to see that the key forward looking component of the PMI index (namely New Sales Orders), fell by 3.0 index points to 48.3. In addition the Backlog of Sales Orders was shockingly low at 40.6, while the Purchasing Commitments index plunged by 7.5 index points. Unsurprisingly, the employment index remained well below the key 50 index level at 45.0. This is the tenth consecutive month that the employment index has been below 50.
The Prices Paid component of the PMI rose to 83.3 from 82.1 in November and a recent low of 75.0 in July 2011, highlighting the ongoing concerns about the generally elevated producer inflation rate (see chart attached).
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.
Unfortunately, there is currently a significant divergence between the actual manufacturing data and the recent PMI readings. In addition, both the monthly as well as the annual rate of change in manufacturing data has been extremely volatile for a considerable period, with a substantial divergence in performance at sector or industry level.
Given the volatility in the data, it is, perhaps, useful to look at the trend cycle index for manufacturing, which clearly shows that although SA manufacturing has recovered from the 2008/2009 severe recession, it has been stagnating for the past year and remains under pressure.
The performance of manufacturing has certainly not kept pace with the performance of the retail sector. Instead it has been negatively impacted by a range of factors including higher import demand (helped by the strong currency), a relatively poor performance in the domestic mining and agricultural sectors, a slump in construction activity as well as a general lack of fixed investment spending.
For 2010 as a whole SA manufacturing activity grew by 4.8%y/y, which was obviously a vast improvement on the 13.4%y/y decline recorded in 2009. Year-to-date for 2011, however, production has averaged an annual growth rate of only 2.5%. While we still don’t expect the manufacturing sector to return to severe recession conditions, it will struggle to gain any real momentum without an improvement in the global economy and/or a revitalisation of the domestic economy in the form of increased investment activity and employment growth.
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