Manufacturing on strong footing in Oct, shows PMI

Supported by a sharp rise in new business orders and with accelerating output performance, the expansion in India’s manufacturing sector gathered pace in October, according to the latest HSBC Purchasing Manager’s Index (PMI).

The index, based on a survey of 500 companies, rose to 57.2 in October from 55.1 in the previous month and 57.2 in August. October was the 19th consecutive month in which the index has risen.

The other good news was job creation. For the first time since May 2010, Indian manufacturers reported a marginal increase in employment during October. This was attributed to a sustained growth in output and new orders. “Growing employment suggests that domestic demand will remain robust. Price pressures, however, are still too strong for comfort, possibly prompting the central bank to increase rates again before the end of the year,” said Frederic Neumann, co-head of Asian economics research at HSBC.

India and China posted the strongest expansion in their respective manufacturing sectors during the month while the UK saw an expansion in output growth for the first time since March. China’s PMI beat market expectations to reach a six-month high of 54.7.

“After some bouncy data in the last few months, India’s economy has picked up steam again. The manufacturing sector remains supported by strong local consumption growth,” said Neumann.

A reading above 50 indicates expansion in the sector while that below 50 shows contraction.

“Not just going by PMI, all the demand-led recovery indicators appear to be quite strong. Domestic investment, corporate sales and earnings are optimistic for industrial growth. Going forward, the trend of moderating that we have seen may get reversed,” said Bank of Baroda Chief Economist Rupa Rege-Nitsure.

Even as the rate of new order growth accelerated from September’s 10-month low, it remained softer than the steep expansions recorded at the start of 2010. Bulk of the new business orders came from domestic demand and, even as new export orders rose during the month, it did so at the slowest pace since November 2009.

However, October also saw an increase in input prices faced by manufacturers and the rate of input cost inflation was stronger than that recorded in September. This has resulted in an increase in output prices. This was relatively small compared to the rise in input costs, indicating that manufacturers were still finding it difficult to pass on increased costs to customers.

Output expanded sharply in October, reflective of a sustained increase in new orders. Despite this, backlogs of work accumulated further, indicating that pressure on operating capacity continued. Finished goods stock rose marginally during the month.