Manufacturing shows improvement

Johannesburg - The seasonally adjusted Kagiso Purchasing Managers Index (PMI) showed a slight improvement, rising to 37.3 points in May compared with April's record low of 35.6 points.

Kagiso Securities has taken over the sponsorship of the PMI from Investec Asset Management.

Manufacturing output activity contracted at a slower pace in May, with the seasonally adjusted business activity and new sales orders indices reaching 35.1 - the best since February 2009 - and 35.7 - a 2009 high - respectively.

"At the very least, the decline in business activity seems to have stabilised," said Andre Coetzee, head of fixed income at Kagiso Securities.

The backlog of sales orders index recovered from a record low 20.5 to 27.2 points.

"The decline in near-term demand may have bottomed out in the light of a recovery in the seasonally adjusted inventories index from April's record low of 28.7 to 35.4 points," Coetzee said.

However, purchasing commitments failed to respond and posted a further marginal decline to 29.6 index points. This suggests that purchasing managers remain sceptical of a recovery in demand over the short term.

The lagged pass-through of weak demand conditions to employment is clear in the persistently low seasonally adjusted employment index.

"The marginal increase from 36.2 to 36.9 points in May points to continued very weak employment in the sector," Coetzee said.

The price index dropped below 50 for the first time since December 2004, indicating that price increases slowed further during May.

"This is a welcome relief on the input cost side for purchasing managers, and will hopefully ease consumer price inflation pressures down the line," said Coetzee.

Purchasing managers are more upbeat about future prospects - a majority of purchasing managers now expect business conditions to improve in six months' time.

Expected business conditions improved from 48.3 to 51.3 points. Expectations were at similar levels in September 2008 just before the global financial crisis intensified in the wake of the Lehman Bothers collapse, Kagiso noted.

"Looking at the rebound in the China, Global and Kagiso PMI there are early indications that the downturn in the manufacturing sector is bottoming out and that this sector could start to recover in the latter part of 2009," Coetzee concluded.

The survey is conducted on a monthly basis by the Bureau for Economic Research at the University of Stellenbosch in conjunction with the institute of Purchasing Managers in South Africa.

- I-Net Bridge