PMI reading no 38 is well below the water

Proshare

Wednesday, June 01, 2016 8:47AM /FBNQuest Research

The latest report for our manufacturing Purchasing Managers’ Index (PMI), the first in Nigeria, shows a marginal improvement from 46.5 in April to 48.2. Our partner, NOI Polls, has compiled the data.

The index is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China, and a few other frontiers.

It is based upon the responses of manufacturers to set questions on core variables in their businesses. The index should be viewed as a forward-looking sentiment indicator, with the proven ability to move markets.

In the model we have chosen (the ISM’s), respondents are asked whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined.

They are asked to make allowances for seasonal factors. A reading of 50 is neutral. We have posted six negative headline readings since our launch in April 2013 including three this year alone.

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

Four of the five sub-indices were negative in May. The strongest reading was 58.5 for delivery times.

We view the poor May report as an extension of the dire national accounts for Q1 2016: GDP contracted by -0.4% y/y, the non-oil economy by -0.2% and manufacturing by -7.0%.

The first quarter tends to be the weakest for growth in the year, not least because of delays in the release of funds from the budget for capital spending. The current year has been no exception.

For Q2, we see a greater contraction for GDP as well as the non-oil and oil economies. PMI readings should logically remain below water.

We attach little importance to the modest improvement in the headline reading, resting largely as it does on the strong recovery in delivery times.

The fact that the employment sub-index was the lowest since our launch and below water for the sixth successive month tells us that respondents do not see a bright near term.

They are in no hurry to increase their payrolls, given the fx and other shortages and the untested nature of the FGN’s policies for the economy.

Significantly, a particular challenge for our partner in the compilation of this report was the need to maintain the set balance in company sizes in the face of redundancies, which, for example, made small companies of previously medium-sized ones.

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