In what may be a pointer to the industrial output in November, ABN Amro’s Purchasing Managers’ Index (PMI), a gauge for the manufacturing sector performance, has suffered its first contraction since its launch three-and-a-half years ago.
“A significant reversal in the strength of the domestic market was the principal factor underlying the weaker performance of manufacturing, as tighter credit conditions and the onset of the global economic downturn hit confidence and reduced clients’ willingness to commit to new spending,” the report released today said.
PMI is derived from individual diffusion indices, which measure changes in output, new orders, employment, suppliers’ delivery times and stocks of goods purchased. If the index falls below 50, it indicates that the manufacturing economy is declining, while a score above 50 points to expansion. A reading of 50 signals no change.
In November, based on the response from purchasing managers from over 500 industrial companies, PMI fell to a record low of 45.8 with all indices — barring suppliers’ delivery times and employment — falling below the 50-mark (see table).
In October 2008, PMI was estimated at 52.2, while in November 2007, the index was at near record levels of over 60.
A contraction in PMI was also witnessed in China, while the index fell in Russia and Hong Kong too. A weaker demand due to the global slowdown led to a scaling back of production at Indian plants in November, the first time since the index was launched in April 2005. Over a quarter of the managers reported a reduction in output.
Similarly, due to adverse market conditions, companies found new orders increasingly scarce. ABN Amro said there were reports that tighter credit conditions were restricting the willingness of clients to commit to new agreements.
Though export orders contracted for a second month in a row, the report cited anecdotal evidence to say that deterioration in domestic demand was especially severe in November. Fewer orders in the domestic and global markets meant that there was a further reduction in volumes of work-in-hand, which was yet to be completed. “Moreover, the rate of decline in outstanding business was a survey record as companies diverted spare capacity towards the completion of existing contracts,” the report added.
The stock of finished goods too declined for the second consecutive month as companies indicated that they were reducing their holdings of finished goods inventory in line with the deteriorating outlook for sales volume. Pre-production inventories too saw the steepest fall in the history of the survey in November.
With fewer orders in the bag and lower output, companies are postponing their hiring decision, the survey said, and pointed to staffing levels remaining unchanged.
With supply-side pressures easing due to a dip in demand, shorter delivery times were reported. Lower production requirements also led to manufacturers cutting back on raw material purchase.
On the price front, while there was a steep fall in the input cost due to cheaper crude oil, metals and petroleum products, a weaker demand is also cited as one of the factors resulting in downward pressure on average factory gate prices in November.
