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Mixed manufacturing readings cloud outlook

Singapore's overall PMI in June slips to 50.5 while electronics PMI rises to 50.7

Not so dire: Even as economists lament the difficulty in assessing June's manufacturing performance, they do not think it's all doom and gloom. - FILE PHOTO

[SINGAPORE] The Republic's purchasing managers' index (PMI) slipped again in June to 50.5 - lower than May's 50.8 reading - and even the apparent uptick in the electronics sector masked underlying weaknesses. The mixed nature of last month's manufacturing performance - where overall PMI dipped while electronics PMI rose - has left economists grappling with what may come next.

DBS economist Irvin Seah told The Business Times: "With June's readings, we really don't get a clear sign of where the overall manufacturing sector is heading. There is no clear upward or downward trend, and things are just running sideways."

By keeping above the 50-point threshold that separates expansion from contraction, June's PMI still signalled growth in the manufacturing sector, despite falling short of expectations. Private-sector economists had earlier forecast a rise in overall PMI to 51.0, just shy of April's six-month high of 51.1.

The slip was due to lower new orders both locally and from abroad, as well as lower production and import levels, said the Singapore Institute of Purchasing & Materials Management, which polls more than 150 industrial companies to compile the index each month.

Inventory continued to expand for the eighth consecutive month, while overall stockholdings of finished goods reverted to expansion. Both were up 1.8 points in June.

Said UOB economist Francis Tan: "To me, the overall performance is quite bad, especially considering the sub-indices. . . People are thinking that business is not good so they're keeping more inventory; they're not importing raw materials because they know they can't sell as much any more."

Singapore's overall reading was not consistent with regional PMI reports, particularly those from China and Taiwan. The former posted its first expansion in June since December, while the latter's reading rose to a four-month high.

But even with last month's softer manufacturing performance, economists such as OCBC's Selena Ling saw the "silver lining in the electronics PMI".

The sector recorded further expansion with a reading of 50.7 in June, up from May's 50.4.

Said Ms Ling: "The electronics PMI saw improvements across new orders, new export orders, and production, accompanied by lower inventory and imports, which bodes well for the industry's near-term outlook - notwithstanding the recent disappointing performance in (electronics output)."

But DBS's Mr Seah believes there is "really nothing to brag about" as far as the electronics cluster is concerned.

"If you look at the sub-indices, it's clear that the uplift comes (quite a bit) from the new orders index (up 1.0 to 51.5). If you put that aside, the 0.1 increases in electronics new export orders and production are as good as flat. . . That shows electronics manufacturers are not seeing any significant improvement in demand," said Mr Seah.

Economists polled by Bloomberg had earlier anticipated a 50.5 reading for the electronics sector index.

Economists found it difficult to say which manufacturing clusters could have dragged purchasing managers' sentiment down. While CIMB's Song Seng Wun thinks the dip could have come from the chemicals or pharmaceuticals segments, UOB's Mr Tan thinks precision engineering or general manufacturing could have been the culprits.

"Unlike industrial production numbers, PMI isn't weighted - it's more of a general diffusion index. So the composition might make the readings harder to interpret," said Mr Song, who noted the possibility of more pessimistic firms pulling down overall sentiment.

Even as economists lament the difficulty in assessing June's manufacturing performance - they blame the "all over the place" latest PMI reading - they do not think it's all doom and gloom.

Said Mr Seah: "Overall, it's not a very rosy picture, but it's not a dire situation either. Things are just relatively flat, and that makes sense because it reflects the current global economic conditions. The US recovery is still sluggish, the eurozone is not out of the woods yet, and Asia is running slower."