Manufacturing sector takes strain

The seasonally adjusted Purchasing Managers Index (PMI)—which measures the level of activity in the manufacturing sector—fell to a record low in February, Investec said on Monday.

“While not surprising, given the very weak global economic backdrop, the February results declined yet again from the prior months and, in fact, were weaker than the record lows reached in November last year,” said Mokgatla Madisha, portfolio manager at Investec Asset Management.

The PMI was 39,2 points in February, down from the 40,7 point level in January,

This did not bode well for gross domestic product growth in the first quarter of 2009.

“After seeing some improvement in December 2008 and in January this year, business activity slowed further and continues to face extreme pressure,” Madisha said.

This view was further supported by the decline in the expected business conditions index, which declined to levels below 40 points in February, to print at 38,3, he added.

Similarly, the new sales orders decline to 31,9 points provided evidence of the weak and uncertain prospects for the manufacturing sector.

The sharp decline in input costs seen in the fourth quarter slowed in February.

“Input costs, which came off sharply in the fourth quarter last year as global commodity prices plummeted, tracked sideways in February.

“Rand weakness is dominating the fall in dollar prices,” Madisha said.

He expected this would have some impact on how monetary policy was conducted over the next few months.

“The continued decline in employment in the sector is a serious concern”.

Over the month, the employment index fell to the 40,8 level indicating that job-shedding amongst manufacturers continued to persist.

“We have seen a sharp decline in employment globally over the last few quarters and it is unlikely that we will be able to escape these forces.

“The recent trajectory certainly indicates that employment in the sector remains under intense pressure.”

He said February’s results were consistent with recent data releases across the globe.

“The precipitous decline in final demand across economies and the sharp slowdown in trade activity continues to provide headwinds to the local manufacturing sector.

“Forward looking indicators remain in negative territory, indicating a weak outlook for the sector,” Madisha concluded.

The survey is conducted monthly by the Bureau for Economic Research at the University of Stellenbosch, in conjunction with the Institute of Purchasing Managers in South Africa and sponsored by Investec Asset Management.

The index is based on the PMI produced by the National Association of Purchasing Managers (NAPM) in the United States.

The PMI is calculated as a weighted average of five individual indices—business activity, new sales orders, employment, supplier deliveries and inventories.

The choice of indices included and the weights used currently for South Africa’s PMI are identical to that of the NAPM.—- Sapa

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