PMI reading no 50: lower but still above water

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a decline from 58.9 in April to 54.0 in May. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies.
In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013, including five in 2016.
Our sample is an accurate blend of large, medium-sized and small companies.
We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.
Four of the five sub-indices declined in May. However, only workforce fell into negative territory while delivery times was the strongest at 64.
Among the answers to the trigger questions, we note seasonal effect (rainy season) as a primary reason for lower production. Large and medium-sized firms recorded significant declines in their stocks of purchases.
Following the release of its circulars in late February, the CBN has improved its sale of fx to retail (for invisibles) and to importers. This has resulted in a pickup in business confidence. However, macro challenges still persist and household pockets remain squeezed; as a result, demand is generally still soft.
The economy is emerging from recession. In Q1 2017, the contraction of the economy narrowed from -1.3% y/y in the previous quarter to -0.5% while the manufacturing sector expanded by 1.4% y/y from a contraction of -2.5% in Q4 2016. Looking ahead to Q2 2017, we see growth of 1.6% y/y.

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