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Factory activity growth recovers in May

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By Reicelene Joy N. Ignacio
Reporter

MANUFACTURING in the country picked up in May after business for factories improved at the slowest pace in nine months in April, with the increase in new orders “the most marked in four months” on the back of a “moderate” improvement in demand that was nevertheless “the greatest since February,” according to the latest monthly survey IHS Markit conducted for Nikkei, Inc.

The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) increased to 51.2 in May from the 50.9 in April, signaling a “modest, but stronger, improvement in the health of the manufacturing sector.”

It was the first time in six months that headline PMI increased.

“Filipino goods producers reported an improved picture in May as output growth strengthened amid a sharper increase in new orders. Firms were helped by a rise in foreign demand for only the second time since last September as the global trade war intensification led to weaker export conditions. This should ease some nerves in the wake of further tariffs announced by the US and China,” a Nikkei news release quoted IHS Markit Economist David Owen saying.

The manufacturing PMI consists of five sub-indices, with new orders having the heaviest weight at 30%, followed by output with 25%, employment with 20%, suppliers’ delivery times with 15% and stocks of purchases with 10%. Readings above 50 signal improvement of factory activity from the preceding month, while those below reflect contraction.




The output index showed increase in production was “moderate” though “the quickest in three months.”

Moreover, the May survey data bared “a sharper increase in total new orders” that was “the highest in four months,” while new export orders marked “the second monthly improvement in external demand” since July last year.

Supply constraints appeared to lessen, with lead times for production inputs cut for the second straight month “and at the fastest rate” in 27 months as further easing of port congestion enabled suppliers to deliver goods on time.

Increase of input costs was the weakest in 39 months, although some survey respondents cited increased prices of produce due to recent weather disruptions.

Selling prices, on the other hand, rose “at the fastest pace since January.”

On the other hand, factories were hounded by “multiple resignations” in May, leading “to the sharpest decline in employment in 15 months as firms chose not to replace these employees.”

“Manufacturers may need to curb these resignations if they hope to sustain higher production levels,” Mr. Owen said.

The outlook on production “improved for the second successive month in May from the record low in March,” Nikkei noted in its press release, with “nearly 59% of respondents” expecting “an increase in activity over the coming 12 months… citing current growth in new orders from home and overseas” as well as “new stores and product launches.”

PROSPECTS UPBEAT
Sought for comment, Robert Dan J. Roces, chief economist at the Security Bank Corp., said in an e-mail that “[t]he improved PMI number may be the first salvo of higher capital formation as sentiment turns to a positive growth outlook.

“With the recent [monetary] policy cuts and tapering inflation, business sentiment is improving and supports our view of stronger growth for the next quarters as domestic consumption picks up,” Mr. Roces said.

“Private investments will continue to sustain jobs and income creation while the government has pledged to accelerate its infrastructure projects after the budget was signed, and so the unemployed in the rural areas can potentially find jobs in non-farm sectors such as construction and manufacturing,” he added.

“Barring potential headwinds from the worsening trade war, an improved manufacturing sector is an essential condition for further economic growth.”

Also sought for comment, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail that “[t]he improvement reflects a pickup in new orders as prospects remain upbeat which could point to a possible rebound in agricultural production in Q2 as well versus Q1’s 0.67% performance.”

“Food manufacturers constitute roughly 33% of the total manufacturing sector and the largest single subsector for manufacturing. A rebound in overall PMI manufacturing could signify a similar improvement in the agricultural sector,” he added.

“Going forward, the Philippine economy hopes to move past the Q1 [economic growth] snafu [with gross domestic product growth clocking in at a four-year-low 5.6%] as well as to see improved performance in both the agriculture and industrial sectors which could complement the ever-reliable performance of the services sector to achieve a more balanced growth dynamic.”