PMI reading no 26: below water


Monday, June 01, 2015 8:55 AM / FBN Capital Research   

The latest report for our manufacturing Purchasing Managers’ Index (PMI) shows a marked decline in the headline reading from 54.0 in April into negative territory at 49.4. 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.

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.

This is only the second negative reading since we launched our index in April 2013. The first in July 2013 was another 49.4. This time we also have the lowest reading to date for both output (41) and employment (44).

The operating environment for business is generally fluid in a frontier market. We had four stable readings with a gentle downward trend in January through to April, followed in May by a sharp deterioration on account of worsening power supplies and fuel shortages.

Unusually, these challenges were on a scale to influence not only output but also employment. It is no surprise that the decline in the output sub-index was most marked for small companies, which are most vulnerable to power and fuel shortages.

The national accounts for Q1 2015 reveal a dramatic turnaround for the worse for manufacturing growth, to a contraction of -0.7% from expansion of 13.5% in Q4 against the background of the macro headwinds (slump in the oil price and in FAAC monies for distribution, and a second devaluation in three months).

The new administration has plenty on its agenda.

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