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PMI rises to 51.9 - highest in 3½ years

Economists attribute uptick to seasonal effects and say manufacturing outlook remains challenging for Singapore due to patchy global recovery

Economist Song Seng Wun says it's hard to relate the improved PMI to activity on the ground, especially when compared to industrial production figures.
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SINGAPORE'S factories were busier than expected in October, with the latest purchasing managers' index (PMI) rising 1.4 points to 51.9 - a level not seen since April 2011. But economists are downplaying the uptick, chalking up the expansion to year-end seasonal effects, and warning that a patchy global recovery will continue to weigh on manufacturing performance.

The further expansion (See infographic here) in overall PMI was attributed to better new orders (up 1.1 to 52.9), new export orders (up 0.8 to 51.5), and production (up 2.0 to 53.1). All other sub-indices - save input prices (down 0.9 to 48.7) and order backlog (down 0.3 to 50.4) - posted higher readings in October as well, according to the Singapore Institute of Purchasing & Materials Management (SIPMM).

This was a better performance than private-sector economists had expected. Those polled by Bloomberg had earlier projected a reading of 50.5 - the same as September's showing. A reading above 50 denotes growth, while one under 50 signals a contraction in the manufacturing sector.

Still, economists cautioned against getting carried away by October's three-and-a-half-year high. Said CIMB economist Song Seng Wun: "On the surface, the numbers look good, and factories seem busier. But it's hard to relate it to activity on the ground, especially when you compare it to industrial production figures - they're not doing quite as well as the picture painted by the PMI."

While industrial production figures for October are not yet available, Singapore's manufacturing output performed worse than expected in September, contracting 1.2 per cent - the first decline since May. Excluding the volatile biomedical sector - which fell 10.3 per cent in September - output would have increased just 0.5 per cent.

Both Mr Song and DBS economist Irvin Seah agree that much of October's expansion was due to year-end seasonal effects. Said Mr Seah: "Orders and production typically pick up just ahead of the year-end festive season, because of the increase in demand during the Christmas period. This is seasonal - it is definitely not sustainable."

The electronics PMI also rose in October - it was up 0.6 to 52.5. Unlike the overall PMI, however, the electronics sector's PMI expansion was not due to a broad-based increase across all sub-indices.

Apart from new orders (up 0.9 to 53.2) and finished goods (which spiked 4.1 to 53.6), there was a softening in most of the other sub-indices. These include new export orders (down 0.5 to 50.9), inventory (down 0.4 to 51.4), imports (down 0.5 to 52.7), prices (down 0.9 to 47.7), deliveries (down 0.5 to 48.6), and order backlog (down 0.4 to 49.1).

OCBC economist Selena Ling said: "The detailed gauges of the stronger electronics PMI reading were not so encouraging . . . This, we suspect, could suggest that the current momentum is likely to slacken in the coming first quarter in 2015 once the Christmas season is past."

Meanwhile, UOB economist Francis Tan said of the electronics finished goods index's sharp rise: "The 4.1 increase was really key - it pulled the whole electronics PMI up. This could be a good or bad thing. On the not-so-good side, manufacturers could have finished goods that they can't sell. But on the flip side, they could be anticipating stronger orders and want to have enough stock to satisfy demand."

Added DBS's Mr Seah: "Going forward, chances are high that manufacturers will run down this stockpile, which will be at the expense of production."

Looking ahead, economists expect to see some moderation in both the overall and electronics PMI. They also forecast a challenging manufacturing outlook, not only because of restructuring constraints at home, but also since a more sure-footed global recovery has still not materialised.

Comparing Singapore's latest PMI reading with other economies', Ms Ling said: "The domestic PMI readings appear to be aligned with the US manufacturing ISM, which unexpectedly surged from 56.6 to 59.0 in October - the highest since March 2011 - but a clear deviation from the eurozone (50.6) and also Asia. China was static at 50.4, and key manufacturing centres like Taiwan also (posted softer readings) at 52.0."