Factory output returns to expansion in September

MANILA, Philippines — Manufacturing activity stabilized in September, indicating a marginal expansion supported by an increase in new orders and slower decline in production, according to IHS Markit.

This was indicated by the rise in the Philippines Manufacturing Purchasing Managers’ Index (PMI) to 50.1 in September from 47.3 in August. This is just above the neutral reading of 50 that separates expansion from contraction.

The latest reading was the highest since February and signaled that operating conditions were broadly stable across the goods producing sector in the country.

The headline PMI provides a quick overview of the health of the manufacturing sector based on the weighted average of five indicators: new orders (30 percent weight), output (25 percent), job creation (20 percent), supplier delivery times (15 percent) and inventories (10 percent).

New orders expanded for the first time since February as customer demand improved following the reopening of more parts of the economy. Mirroring the trend seen for new orders, export sales also expanded in September, ending a six-month contraction.

At the same time, output contracted at the weakest pace in three months.

Employment, however, continued to fall as firms refused to replace those who quit their jobs.

Inventory levels also rose for the first time in seven months in September although at marginal rates.

On the price front, cost burdens continued to rise for manufacturers in September because of higher transportation costs, shortages of materials, and supplier surcharges.

However, they have difficulty passing on the higher costs to consumers because of the tough competition. As a result, firms passed on higher costs to consumers only marginally.

“The latest Philippines manufacturing data showed that operating conditions stabilized at the end of the third quarter. New business expanded for the first time since February, albeit tentatively, while production levels dropped only slightly,” said Shreeya Patel, economist at IHS Markit.

“According to firms, the ongoing restrictions related to the COVID-19 pandemic continued to limit the performance of the sector, with some businesses forced to pare back operations.”

Goods producers in the Philippines remained optimistic about output volumes over the next 12 months. Business expectations were the highest since February as firms hope demand will return to its pre-virus levels.

“On a more hopeful note, stronger business sentiment and efforts to rebuild stocks suggest panellists are preparing for an improvement in demand over the coming months, although optimism continues to rest on the development of the pandemic,” said Patel.

Region-wise, manufacturing conditions in ASEAN remained challenging in September as a renewed decline in output was seen and new orders fell further. Firms also slashed their staffing levels for the 16th month running.

The headline manufacturing PMI for ASEAN fell to 48.3 in September from 49.0 in August, signaling a fresh deterioration although at a modest pace.

“Conditions across the ASEAN manufacturing sector remained challenging at the end of the third quarter. The headline PMI signaled a seventh consecutive deterioration in the health of the sector, amid a renewed decline in factory production and a further fall in total new orders,” said Lewis Cooper, Economist at IHS Markit.

“With demand conditions still muted both domestically and abroad, and capacity pressures remaining weak, firms made further cuts to their staffing levels. The rate of job shedding did ease slightly, but was still solid.”

Looking ahead, the 12-month outlook for output improved for the second month in a row, with the level of positive sentiment reaching an eight-month high.

“But, with virus cases rising in some countries and in other parts of the world, the downside risks from the reintroduction of stricter lockdown measures are concerning,” said Cooper.