The Purchase Manager Index (PMI) for the month of June 2017 came in slightly above the 50 mark in case of the PMI Manufacturing, although it was comfortably above the 50 mark in case of PMI services. The PMI of manufacturing and Services had taken a sharp hit in the immediate aftermath of the demonetization exercise in November and December. It was only post February that the impact of the remonetization on PM was visible. However, the PMI numbers are still quite erratic and struggling to stay above the cut-off mark of 50.
The cut-off of 50 is crucial as it marks the difference between expansion and contraction of economic activity. To get a better picture of economic activity, each month the IHS Markit calculates the PMI for services and for manufacturing separately. A PMI level of above 50 indicates an expansion while a PMI level of below 50 indicates contraction in economic activity. The PMI should also be looked at on a sequential basis (month-on-month) as it reflects the momentum of the expansion. Take the case of PMI Manufacturing for the months of May and June. While in both the months the PMI has stayed above the 50 mark indicating expansion, it is evident that manufacturing has shown a loss of momentum in June versus May. Similarly, the PMI-Services have gained momentum on a month-on-month basis.
Components of PMI-Manufacturing for June 2017
The PMI manufacturing is a combination of some key economic variables. These include new order flows, purchase of inputs and inventories, manufacture of finished products, closing stock accumulation and jobs created. Each of these variables tends to behave in a different manner and each has a certain connotation from a macroeconomic analysis point of view. For the month of June, the expansion in output was at the weakest level in the last 4 months since February 2017. Of course, the tepid production in June could be attributed to the launch of GST from July 01st which had forced many businesses to focus more on disposing outstanding inventory rather than focusing on expanding production. A clearer picture on this front will emerge once the July and August data for PMI come out.
Growth of new orders was also at a four-month low and that could again be attributed to the uncertainty over the GST. Most purchase managers were putting their new orders on hold and waiting to understand the full implications of GST for their industry. That could again get rectified in the months of July and August. However, the good news came from the international orders, which grew at a much faster clip compared to domestic orders and that somewhat compensated for the weak domestic situation. On the inputs front, the inflation momentum has been slowing and that could probably be a harbinger of weaker WPI inflation in the coming months. That number has remained tepid for quite some time now. The GST also created a divergent situation where businesses were continuing to accumulate raw material inventory while trying to dispose of finished goods inventory. This could also have been largely driven by the GST effect.
When it comes to PMI Manufacturing, a quarterly view would be more beneficial. For the quarter ended June 2017, the average PMI Manufacturing stood at 51.7 compared to 51.1 for the previous quarter. At least, the manufacturing sector appears to be coming out of the demonetization crunch.
Breaking up the PMI-Services for the month of June 2017…
Compared to PMI Manufacturing, it was the services sector that really had room for cheer. Remember, the PMI Services had come under pressure on the aftermath of the demonetization as it had dipped well below the 50 mark. In case of GST, it actually appeared to favour the services sector. Growth of new services orders grew at the fastest clip in the current fiscal with most service orders getting front-ended to take the benefit of lower services tax. It may be remembered that in the post-GST scenario, the tax on most of the services will go up from 15% to 18%. The reason the PMI Services is critical is that it normally tends to act as a forerunner for manufacturing. For the month of June, the PMI Services was at a yearly high due to a spurt in fresh service orders, increase in headcount as well as a sharp increase in throughput.
While the inflation has been tepid in case of manufacturing, it has been quite robust in case of services. Therefore, while goods inflation will be tepid in the months to come, there could be an element of higher services inflation playing on the CPI and WPI numbers. From the Indian GDP perspective this is good news because, services account for nearly 65% of the overall GDP, while manufacturing is much lower. Thus a robust pick-up in services will be a good signal for the GDP in the first quarter of fiscal 2017-18. A lot of the future PMI trajectory will be contingent on the actual implementation of the GST across India!