PMI reading no 20: lower but still in the mid-50s


Monday, December 01, 2014 4:32 PM / FBN Capital Research



The latest report for our manufacturing Purchasing Managers’ Index (PMI) shows a retreat in the headline reading from 59.4 in October to 55.8. Our partner in this exercise, NOI Polls, has compiled the data.


The index is a familiar release at the start of the calendar month in developed markets (such as the ISM in the US), the larger emerging markets like Brazil and China, and a few other frontier markets such as Vietnam. At some point, we should like to launch an index for services, which comprises 51% of the economy in the rebased national accounts.  


The index is based on the responses of a number of manufacturing companies to set questions on core variables in their businesses. It is unweighted.


In the model we have chosen (the ISM’s), they are asked whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved, are unchanged or have declined. They are asked to make allowances for seasonal factors in their responses. A reading of 50 is neutral.


Our sample is a representative blend of large, medium-sized and small companies.


We have seen several pronounced swings since we launched our index in April 2013 but only once has there been a negative headline reading (49.4 in July 2013).  In our view these swings are consistent with Nigeria’s frontier market status. Changes in the operating environment such as access to electricity, fuel and credit, as well as swings in business and consumer confidence, help to explain these movements.


The new national accounts (base year 2010) show manufacturing growth of 16.0% y/y in Q3 2014. These stellar growth figures for the sector may cause a few heads to turn yet are consistent with the rapid, consumption-led transformation of a frontier market.    


We see the retreat in the headline index in November as influenced by deteriorating consumer and business sentiment. The macro headwinds are to blame: sliding oil prices, depletion in the official reserves, currency weakness leading to devaluation and monetary tightening, which should push up borrowing costs in the real economy.


The most encouraging, forward-looking trend in the latest report is that the reading for new orders is again the highest of the five sub-indices.    


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