Singapore PMI up at 50.9 but stock build-up raises flag

[SINGAPORE] Singapore's Purchasing Managers' Index (PMI) moved further into expansion territory in February, but a build-up in inventories and stocks of finished goods has caught economists' attention.

Some say that the fact that manufactured goods are not being shipped out yet could reflect lacklustre demand and suggest a slowdown in the pace of production going forward. But others reckon that the accumulation is likely to be the result of seasonal weakness and bad weather conditions in the US.

February's PMI reading stood at 50.9. This followed a January reading of 50.5, and surpassed market economists' consensus forecast of 50.3. While the electronics sector continued to expand for the 13th consecutive month, the electronics PMI slipped to 51.2 in February, down from 52 in January.

A reading above 50 denotes growth, while one under 50 points to a contraction.

According to the Singapore Institute of Purchasing & Materials Management (SIPMM), which compiles the monthly barometre of industrial activity, the improvement in overall PMI has been attributed to expansion in new orders and new export orders, as well as production output and inventory.

The inventory sub-index posted a reading of 52.9, the highest since December 2011, while the index for stocks of finished goods rose beyond the 50-point threshold to 50.8.

Noting that stocks of finished goods are "historically usually at negative levels", DBS economist Irvin Seah said: "Suddenly, manufacturers are seeing inventory building up, and finding themselves stocking up finished products. This suggests that production levels are soon going to taper off, even if (they are) currently quite strong."

Added CIMB economist Song Seng Wun: "I will be watching (the inventory index), because it can go either way. Higher inventories could be a sign of demand slacking, but it could also be businesses in anticipation of demand recovery."

Indeed, SIPMM executive director Janice Ong said that there is "anecdotal evidence" that electronics manufacturers are expecting a surge in order demand in coming months.

But Barclays and UOB economists have another take, citing frigid weather conditions in the US, which have likely suppressed export orders.

Said Barclays economist Leong Wai Ho: "The snowstorm in the US is masking the underlying improvement at the moment. Which is probably why finished goods are stacking up in factories in North Asia and Singapore because of unprecedented disruptions to air freight to US destinations in January, and probably in February and March as well - due to airport closures and unwillingness to ship."

UOB's Francis Tan also pointed out that the US PMI new orders sub-index fell from 64.4 in December to 51.2 in January. "Given that they're one of our biggest trading partners, it's not really a surprise that new export orders - while still above the 50-point mark - are down for both overall and electronics PMI," said Mr Tan.

Barclays's Mr Leong expects positive payback in exports to the US in Q2, and says that "this means purchasing activity across Asia should pick up in March and April".

But Bank of America Merrill Lynch economist Chua Hak Bin has his reservations. "We've been a bit disenchanted with PMI readings over the last year, since (they have) not been synchronised with actual export figures . . . I think generally, there's a worry that December's surge in exports across Asia has not followed through in the early part of this year, so I'll be waiting for February and March manufacturing and trade numbers to come in."

Together with economists from CIMB and UOB, DBS' Mr Seah believes that the overall manufacturing sector will stay in expansion mode, but at a slower pace of growth.

At the same time, at least three economists flagged the unfolding instability in Ukraine as a key risk to watch out for.

Said OCBC's Selena Ling: "Looking forward, the manufacturing recovery theme remains intact, predicated also on the global recovery theme, but could be more modest in its trajectory given the emerging geopolitical headwinds and challenges facing China due to its ongoing economic reform agenda."