JPMorgan India: Composite PMI at a 11 month high, but masks inner tensions

India: Composite PMI at a 11 month high, but masks inner tensions

In a sign that perhaps economic growth may have bottomed – even though any upturn is expected to remain modest – the May composite PMI rose to a 11 month high, but largely on the back of the services sector even as manufacturing momentum remained muted. Furthermore, conflicting signals were not limited to just activity in the two sectors. Even the emanating price signals from manufacturing and services were a bit surprising given the circumstances, suggested multiple cross currents at play. Services firm up In the details, the composite May PMI business activity index printed at 50.7 – up a solid 1.2 pts from the April reading of 49.5 – and the highest reading since June 2013. The only quibble was it was driven almost exclusively by the services sector. Business activity within services rose a solid 1.7 pts to 50.2, the second successive increase and the first reading above the 50 threshold in almost a year. And the same message came through in the forward looking component, with the new order index also rising for a second successive month, and breaching 50 for the first time in almost a year. Even as manufacturing continues to stagnate In contrast, the manufacturing PMI continues to remain disappointingly stagnant. The headline index was flat for a third consecutive month, printing at 51.4 vis-à-vis 51.3 the previous two months. The output index, too, remained flat vis-à-vis April, and is lower than in the previous few months. The only solace is that new orders ticked up – as did export orders . The latter, in particular, will be a relief after the sharp slump in export orders in April, following the growth disappointment in developed markets in 1Q. To be sure, the lift in new orders, did cause the orders/inventory ration to tick-up, but largely because of the sharp fall-off last month. A price signal dissonance Similarly, there was slight dissonance among price signals. The good news is that – despite some pick-up in activity and orders for two consecutive months – services price pressures continue to be contained. Both input and output prices moderated in May, and both indices are at a 10 month low. The question remains if services growth were to continue firming up – at least in the PMI – will price pressures also begin to firm up? As the chart below demonstrates, output prices appear meaningfully correlated with business activity with a lag of 3-6 months, as one would accept. They key will be how input prices evolve – particularly wages – given their relatively important role in services. In contrast, despite continuing activity weakness, manufacturing output prices surprisingly ticked up by almost a full point to 51.7 from 50.9 in April. With the input price index still ticking down (54 in may from 54.6), we will treat the output price dynamic as noise for now, unless the same trend persists next month.

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