Edge and Odds

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Edge and Odds

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JAPAN MANUFACTURING PMI WEAK ON FALLING ORDERS

Manufacturing operating conditions in Japan worsened at the end of the second quarter of 2016. Production declined for the fourth month running, led by a drop in new orders. Underpinning the fall in total new orders was a sharp contraction in international demand, with new exports decreasing at the same rate as May’s 40-month record. As a result, employment growth slowed and was only marginal overall. Buying activity was also cut back and at the quickest rate in over two years.

On the price front, input prices declined, albeit at only a marginal rate. Meanwhile, charges fell at the sharpest rate since February 2013.

The headline PMI posted 48.1 in June, up from 47.7 in May, signalling a slightly slower rate of deterioration in operation conditions at Japanese manufacturers. However, the latest reading contributed to the lowest quarterly average since Q4 2012.

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Contributing to the overall worsening in operating conditions was a fall in production. According to panellists, a decline in new orders from both domestic and international clients led to a reduction in output. Some firms also mentioned the earthquakes that occurred back in April as still having a negative effect on manufacturing production.

A fall in output was matched by a decline in new orders in June. A key driver behind the fall in total new orders was a marked drop in international demand. Evidence suggested that, due to the appreciation of the yen against the dollar, global competitiveness was reduced which led to a decrease in trade volumes.

Consequently, manufacturers were cautious towards their hiring policies, with the rate of job creation slowing to the weakest rate in the current nine-month sequence of expansion. Goods producers also cut back on their buying activity for the fourth consecutive month.

With a slump in demand, less pressure was placed on capacity and volumes of unfinished work were depleted. Stocks of post-production items were also
reduced, albeit at only a fractional rate.

Meanwhile, the higher yen against the dollar drove down raw material prices and led to a fall in cost burdens. Subsequently, charges declined at the quickest rate in over three years.

CHINA MANUFACTURING PMI SINKS TO FOUR-MONTH LOW

Overall, economic conditions in the second quarter were considerably weaker than in the first quarter, which means there has been no easing of the downward pressure on growth.

Chinese manufacturers reported the sharpest deterioration in operating conditions for four months in June, with output falling at the quickest rate since February amid a further drop in new work. Consequently, companies continued to pare back their staff numbers at a solid pace, while trimming their inventory holdings of inputs and finished goods further. Prices data indicated a renewed fall in cost burdens faced by Chinese goods producers, while output charges were left broadly unchanged after a three-month sequence of inflation.

Adjusted for seasonal factors, the Purchasing Managers’ Index™ (PMI™) registered at 48.6 in June, down from 49.2 in May, to signal a further deterioration in the health of China’s manufacturing sector. Furthermore, the rate of deterioration, though moderate, was the fastest seen in four months.

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A faster contraction of manufacturing output weighed on the headline index in June. Furthermore, it was the quickest reduction in production for four months. Panellists widely commented that poor market conditions and a drop in new work had led them to cut output. Weaker client demand was highlighted by a second successive monthly fall in total new work placed at manufacturing firms during June, albeit marginal. Data suggested that part of the weakness stemmed from softer foreign client demand, with new export sales declining for the seventh month in a row and at a moderate pace.

As part of efforts to cut costs and raise efficiency, businesses reduced their staffing levels again in June. Employment in the sector has now fallen in each of the past 32 months. Furthermore, the rate of contraction was similar to those seen in the preceding four months and solid. Meanwhile, backlogs of work rose, with some respondents linking growth to new product developments. Though modest, it was the fastest rise in outstanding workloads for a year-and-a-half.

Fewer new orders contributed to a reduced amount of purchasing activity across China’s manufacturing sector in June, though the rate of reduction was only slight. At the same time, companies maintained tighter inventory policies, with stocks of both pre-production and finished goods falling, albeit at slower rates than in the previous month.

Despite another drop in input buying, lead times for deliveries continued to lengthen in June amid reports of stock shortages at vendors. However, the rate at which supplier performance deteriorated was only slight.

After a three-month sequence of inflation, average cost burdens faced by Chinese goods producers fell in June. Some respondents mentioned that deflationary pressures stemmed from lower raw material costs. That said, the rate of reduction was marginal overall. Meanwhile, prices charged by Chinese manufacturers were broadly unchanged since the previous month.

China’s official PMI:

China’s National Bureau of Statistics reported Friday that the official manufacturing purchasing managers index edged down to 50.0 in June, the level that separates expansion from contraction, from 50.1 in May.

Official subindexes measuring new orders and raw material inventory both declined in June from May, while the official production subindex improved slightly, the statistics bureau said. China’s official nonmanufacturing PMI, which measures activity in the service sector and which was also released Friday, rose to 53.7 in June from 53.1 in May. (WSJ)