Forecasters are feeling gloomy

2012-06-05 00:00

RESULTS from a slew of purchasing manager surveys showed last week that manufacturing activity slowed around the world in May, including in South Africa. That should scare you. Here’s why.

Why should I care what they think?

Although they wouldn’t necessarily top your list, purchasing managers in the manufacturing industry are remarkably accurate economic forecasters.

These men and women purchase the raw materials that companies use to make the products that you and I buy. If they think that the economy is going to pick up, they purchase more. If they think that the economy is going to slow down, they purchase less.

The United States Institute for Supply Management (ISM) figured out a long time ago that as a group these managers are pretty good at what they do. So in 1948, the institute started to survey them regularly. Since then, the ISM’s survey methods have been replicated around the world.

Universally, economists ask about new orders, production, employment, supplier performance, inventories, materials prices, back orders, imports and exports. From the data collected in the first five of these categories, they construct a purchasing managers’ index (PMI).

The first important thing to look for in these indices is whether a given month’s reading is above the 50 mark, meaning the manufacturing sector is expanding, or below 50, meaning the sector is contracting.

The second thing to look for is movement from one month to the next. If an index’s reading rose, manufacturing conditions improved. If it fell, conditions deteriorated. Because recessions tend to appear first in the manufacturing sector, these PMI reports are an extremely reliable indicator of future economic activity overall.

Okay, so what are they saying?

With few exceptions, last week’s survey results made for scary reading. J.P. Morgan reported recently that the global manufacturing PMI fell to 50,6 in May, its lowest reading since December.

In the U.S., the world’s largest economy, the Institute for Supply Management’s headline manufacturing index fell, as did measures of production and export orders.

The numbers were no better in China, the world’s second-largest economy. The country’s official PMI dropped from a headline reading of 53,3 in April to 50,4 in May.

Unofficial figures from HSBC, the global bank, were even grimmer. Their China index, which has remained in contraction territory for the past seven months, fell from 49,3 to 48,4 over the same period.

Elsewhere in the East, PMIs dropped in India, South Korea, Taiwan and Vietnam. Australia’s index slid to its lowest level in nine months.

In Europe, the news was even uglier. The 17-nation euro zone’s PMI fell to a three-year low in May, indicating a 10th straight month of contraction. Germany, the continent’s largest economy and industrial powerhouse, recorded its sharpest deterioration of business conditions since June 2009.

Conditions in France, the continent’s second-largest economy, also worsened. The country’s headline measure slipped from 46,9 in April to 44,7 in May. Staffing levels declined at their fastest pace since September 2009.

Across the rest of the troubled region, which is South Africa’s largest trading partner, Ireland and Russia posted good news, but indices deteriorated in the Czech Republic, Italy, Poland, the Netherlands, Spain, Turkey and the United Kingdom. Greece and Italy’s measures showed gains, but still remained deeply in contraction territory.

Here at home, the numbers were equally unsettling. South Africa’s PMI also fell, led by slowdowns in business activity and new sales orders, signalling a further decline in activity in the months ahead.

If you wanted confirmation that the world’s economy is slowing, you just got it.

• Matt Quigley, currently developing Exchange Data International’s business in South Africa, formerly worked for the U.S. Treasury Department and the Federal Reserve Bank of Boston. He writes in his personal capacity.

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