The contraction in Manufacturing: PMI

The contraction in Manufacturing: PMI

According to the recent IHS Markit India Manufacturing Purchasing Managers’ Index (PMI), India’s manufacturing sector activity contracted at a faster pace in July 2020 than in June 2020.

Manufacturing PMI:

• It stood at 46 in July 2020, down from 47.2 in June 2020.
• In PMI parlance, a score above 50 means growth, while a score below that denotes contraction.
• This is the fourth straight month of contraction for the Indian manufacturing sector. In April, the PMI had slipped into contraction mode, after remaining in growth territory for 32 consecutive months.
• The manufacturing PMI showed some recovery in May, and further in June 2020, but it once again slipped in July 2020.

Reason for Contraction:

• The demand conditions remained subdued with some businesses still closed amid lockdown extensions due to the emergence of new epicenters of the Covid-19 pandemic.
• Export orders have also witnessed a decline.

Effect:

• The re-acceleration of declines in the manufacturing sector is undermining the trend towards economic stabilization seen over the past two months. The firms have reduced both staff numbers as well as purchasing activity.

Purchasing Managers Index (PMI)

• PMI is an indicator of business activity and the index is calculated separately for Manufacturing and Services. It is released every month by 'IHS Markit', which is a global information provider private firm.
• The PMI is derived from a series of qualitative questions. Executives from hundreds of firms are asked whether key indicators such as output, new orders, business expectations, and employment were stronger than the month before and are asked to rate them.  50 is the base level of the index and a figure above 50 denotes expansion in business activity and anything below 50 denotes contraction.
• The PMI is usually released at the start of the month for the previous month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available. It is, therefore, considered a good leading indicator of economic activity. Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later. Central banks of many countries also use the index to help make decisions on interest rates.

Source: The Hindu