Tuesday, November 1, 2011

01/11/2011: Manufacturing PMI for October

NCB Manufacturing PMI for Ireland is out this morning with some surprises to the positive side of things. Let's start from the top:

  • Irish manufacturing production rebounded in October with new orders increasing for the time since May. The rebound was extremely shallow with PMI reaching just 50.1 (barely above 50 mark that denotes expansion). PMI reading has improved dramatically, however, rising from 47.3 in September. 12mo average remains above current levels at 52.0, 3mo average is however below at 49.0. Previous 3mo average was 49.9. 2010 average for the 3 months through October was 50.1. 
  • It is worth noting that with the historical standard deviation of 4.6 and standard deviation for the crisis period of 5.9, the current expansion reading is really statistically meaningless. 

As chart above further highlights:

  • Output expanded strongly to 52.7 in October, up from contractionary reading of 49.8 in September. The latest reading compares favorably against 3 mo average of 51.6 and is statistically significant for the entire history of the series, but is not statistically significant for the crisis period data. 
  • New orders posted an expansion of 51.4 up from September contractionary reading of 45.8 - a considerable increase in mom terms, pushing the series well ahead of 3mo average of 48.3, but still below 52.7 12mo average. However, the new reading remains statistically insignificantly different from 50 both in historical terms, in terms of data since January 2000 and in terms of data for the crisis period (since January 2008). The increase in total new orders growth was solid, and the fastest since April.
  • New export orders posted a slight slowdown in the rate of contraction moving to 49.8 in October from 49.2 in September. Obviously, both readings are not statistically significant from 50 as new exports sub-index is more volatile than majority of other components of PMIs. However, the new reading is still below 12mo average of 55.2, below 3mo average of 50.8 and below 3mo average through October 2010 of 53.0.
  • The surprising factor here is that the overall PMI in manufacturing is now moving in the opposite direction to New Export Orders. According to NCB: "Anecdotal evidence suggested that uncertainty surrounding the eurozone had a negative impact on new business from abroad. Conversely, there were some reports that favourable exchange rate movements had helped to stimulate demand."

Chart above shows that profit margins have continued to shrink in October (more on this later in the week once we have Services PMI data as well). The contraction in profit margins was driven by significant increase in inputs price inflation and continued deterioration in output prices. stock of purchases and stocks of finished goods continued to contract.

Crucially, per chart above, employment sub-index posted another contraction in October at 47.1 against 46.5 in September. The index 12mo average is now at 50.5 and 3mo average through october is 48.2. 3mo average for the period to July 2011 is 49.1 and the current contraction is statistically significant.

So on the net - the slightly positive news on overall PMI and new orders fronts are clearly offset by negative readings on new exports orders, profit margins and employment. These suggest that we might be witnessing a 'dead cat bounce' effect. If the new trend toward cautious growth were to be supported by data, we need couple more data points to see this.

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