PMI up, but manufacturing growth remains flat
Although the size of the increase in PMI business activity looks strong, the index points to flat manufacturing output growth.
The Absa Purchasing Managers’ Index (PMI) improved slightly in August, increasing by 2.4 points to 49.7, just below the key 50-point mark, driven by the business activity index which jumped by almost 12 points to 50 after a large decline of almost 11 points in July.
The PMI is an economic activity index based on a survey conducted by the BER among a representative group of purchasing managers in the South African manufacturing sector who have to indicate each if a particular activity, such as new sales orders, increased, decreased or remained unchanged for their companies.
In the index a value of 50 indicates no change in the activity, a value above 50 indicates increased activity and a value below 50 indicates decreased activity.
The new sales orders index was also higher in August but remained well below the level of 50 that separates expansion from decline and the BER says this continued to reflect subdued demand for local manufactured goods.
The supplier delivery index, which is inverted to show an increase when delivery lead times are longer, increased further in August to lift the headline PMI. The BER says in the pre-Covid environment, longer lead times were normally associated with stronger demand conditions in the factory sector.
However, the further lengthening of delivery times in August followed a significant jump during July, when orders probably took longer to arrive amid disruptions linked to the torching of several trucks on the N3 transport corridor.
In August, the week-long taxi strike in Cape Town, which led to significant worker absenteeism across sectors, most likely explains the further lengthening of delivery times, the BER says. Because the most likely reason for longer delivery times in August was a supply-side constraint as opposed to higher demand, the headline PMI was, at least to some degree, again kept afloat artificially.
PMI purchasing price index to increase again
After large declines in the previous two months, the purchasing price index rose somewhat in August and may reflect the just more than 70c/litre diesel price increase at the start of the month. With a substantial diesel hike of more than R2.50/litre looming in early-September, the price index, which measures monthly price changes, has some scope to rise further in the near term, the BER says.
The PMI employment index sagged by around 4.5 points to a low 42.8 in August, after hovering between 47 and 48 in June and July and the BER says this does not bode well for the official employment statistics in the factory sector.
According to Stats SA’s Quarterly Labour Force Survey, formal employment in the manufacturing sector declined by 53 000 in the second quarter compared to the first quarter of the year. The PMI figures for July and August do not instil confidence of a recovery in the factory sector job market during the third quarter, the BER says.
The business activity index increased notably in August, but the BER says even at 50 the index points to flat month-on-month growth in manufacturing production. It remains unclear exactly what drove the large decline in this index during July.
Apart from the ongoing impact of load shedding, in terms of specific constraints on output in August, the week-long taxi strike in the Western Cape comes to mind and the BER says anecdotal evidence suggests that several manufacturing facilities were impacted by worker absenteeism associated with the strike.
The new sales orders index saw a marginal improvement in August but remained well below the key level of 50, suggesting that underlying demand for local manufactured goods was still under pressure. An improvement in export sales during the month helps to explain the modest increase in this index, the BER says.
At 48.3, the inventories index remained largely unchanged for a third consecutive month during August.
PMI stronger, but weaker going forward
Economic research group, Oxford Economic Africa, says the improvement in the business activity component suggests some stability in the sector, but another reading below 50 in the new sales component hints at further weakness going forward.
“The supplier deliveries component played an important role in pushing the overall index to the neutral 50-point mark, meaning actual conditions most likely deteriorated on a month-on-month basis. Job losses continued in August, while imminent fuel price hikes point towards further increases in the price index in the coming months.”