PMI jump: the devil is in the detail

The July readings were the highest in eight months on the back of new business orders and better output. But this remarkable rise in the headline index could be a one-month surprise. The performance of several PMI sub-indices measuring various aspects of manufacturing activity is not as encouraging. In fact, they point to the underlying pain this area is dealing with.

According to the New Orders Index, domestic demand was the biggest pick, rising from 55.7 in June to 60 in July. “But despite increased orders and output, there was no indication that companies were operating against capacity constraints,” Adam Hoyes, assistant economist at Capital Economics, said in a report on August 1. As the accompanying chart shows, the Backlog of Works index held steady at 50.5 in July.

Second, the new export orders index weakened and fell to 52.6 in July from 54.9 in June. It should come as no surprise that the recently published Flash PMI of advanced economies points to poor external demand. But with export recovery delayed, the overall trade momentum in the Indian manufacturing sector will eventually suffer.

“In July, India has seen an improvement in manufacturing PMI as compared to export-oriented economies such as Vietnam, Philippines, Taiwan and China, which have seen moderate to sharp decline. Given that global demand is at a weak level, India is unlikely to stay out of the trend for long,” said Madhavi Arora, principal economist, Emkay Global Financial Services Ltd.

Moreover, the job creation scenario in India’s manufacturing sector is in a deplorable state. The PMI report said that 98 per cent of the firms surveyed opted to leave the workforce numbers unchanged amid lack of pressure on operational efficiencies.

Simply put, things aren’t exactly hunky dory right now. Had this been the case, there would have been a huge improvement in trust among Indian manufacturers. Trade optimism projected by the Futures Output Index rose from 50.9 June to just 51.3 July. According to the PMI survey report, the overall level of business sentiment remained muted in terms of historical data, despite improving from a 27-month low in June.

“In fact, 96% of manufacturers anticipate no change in production from current levels during the coming 12 months,” the PMI report said.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, points out that growth in the future output sub-index barely matches the huge gains indicated in April and May. Therefore, he expects the manufacturing bump in India’s PMI in July “likely to be one-sided.”

On the good side, cost inflation pressure is easing with input price index at 11-month low. That said, inflation as measured through the Consumer Price Index is still operating above the Reserve Bank of India’s (RBI) comfort level of 6%. Economists believe that companies in both the manufacturing and services sectors will continue to hike prices to protect their profit margins. This means that while the input cost may not rise sharply, the selling price may move upward.

Meanwhile, in its policy meeting this week, the RBI is expected to hike the repo rate by 35-50 basis points. One basis point is 0.01%. Economists expect the quantum of rate hikes to be modest if inflationary pressures ease.

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