SHOULD WE BE WORRIED BY FALLING PMI?

about 4 years ago
No Image

Yesterday, the Manufacturing PMI for Nov came in and it was lowest over the past three months.

The IHS Markit India Manufacturing PMI declined to 56.3 v/s 58.9 in Oct, much below the expected consensus among economists of 57.3

So, should we be worried? Does this mean that all the pent-up demand is drying up and with festive season also over, we will now once again go back to languishing growth or worse, contraction?

Now, that’s too drastic a conclusion. The good part about Nov PMI, despite being lower is that it remains over 50 – that’s the threshold which indicates whether or not the economy is on an expansion trajectory. It indicates that the animal spirit is there but it still remains leashed by the uncertainty of the pandemic.

PMIs – Manufacturing as well as Services are monthly economic surveys of carefully selected companies. They provide an advance signal of what is really happening in the private sector economy, by tracking variables such as output, new orders, employment and prices across key sectors. In many ways, PMIs are more timely than other economic data such as retail sales and industrial production.

Each month, the PMI providers ask business mangers a series of questions and the indices used are – Output, new orders, employment, input prices, output prices, backlogs of work, Future activity, suppliers delivery time, quantity of purchases, stocks of purchases, stocks of finished goods and new export orders.

And what were the answers we got this month on some of the indices?

New orders – rose at slowest pace in three months

Output – sharp and stronger than seen for eight years prior to September

Quantity of purchases - rose at the slowest pace in three months.

Input costs – a much quicker pace of increase

Output prices – on the rise as manufacturers adjusted it to meet the rising input costs

New export orders – lower than Oct but survey participants said demand is strong

Employment – continued to fall as social distancing norms either got stricter or remained in place.

Backlog of work – increased in Nov

The business confidence has most certainly come down in Nov but underlying this, the economy is expected to grow.

Historical data shows that after every crisis, there has been a double-digit annual stock market growth for a 5-year period after the sharp decline in manufacturing PMI. Well, we seem to have passed the sharp lows – so best to stay bullish even when there is panic on Dalal Street.

Articles you may also like

Popular Comments

No comment posted for this article.