In May 2010, the Kagiso PMI manufacturing index was recorded at a disappointing 51.1 index points, well down from 55.2 in April, 55.6 in March and a peak 60.4 in February 2010 (seasonally adjusted). Although this is the seventh consecutive month that the index has been above the key 50 index level, it the third consecutive monthly decline. The market was expecting the index to rise to 55.5.
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 May 2010 reflected a sharp fall-off in a number of sub-components including business activity, (which was down 5.3 index points), new sales orders (down 4.3 index points), and employment (down a dramatic 8.9 index points. This is the lowest PMI reading since November 2009.
The analysis provided by the BER suggest that the recent Transnet strike, which took place in the second half of May, could be at least partially to blame for the disappointing decline in the index. This certainly seems possible, although there could also be an adjustment related to the normalisation of the inventory level. The further increase in the PMI prices paid index in May is also concerning in that it suggests that PPI inflation is likely to push higher over the coming months.
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 Q1 2010, manufacturing is likely to slump in Q2 2010, negatively impacting the Q2 2010 estimate of GDP. Given the extensive strike within Transnet in May, some fall-off in industrial activity would certainly have been anticipated. Hopefully the manufacturing sector will recover somewhat in June, but we are anticipating that SA’s industrial activity will be somewhat disrupted by the Soccer World Cup from 11 June to 11 July due to the increased number of people taking leave as well as an increase in absenteeism or short-time, as people watch the tournament.
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