How much of the manufacturing PMI decline was seasonal?

  • The official manufacturing PMI fell to 49.3 in October from 50.1 in September, below the market consensus of 49.9 and Nomura’s forecast of 49.8. Nomura believes the decline mainly reflected a pullback after a seasonal rebound in September; it also fell by 0.8 percentage points in the same period last year.
  • To reduce the effect of seasonal volatility in a single month, Nomura compared the average from month 9 through October: the manufacturing PMI was 49.7, only slightly below August’s 49.8 and close to the average of 49.8 recorded both from month 6 through July and in the first 5 months.

What is the relationship between manufacturing supply and demand after stripping out some volatility?

  • The average production index from month 9 through October rose to 50.8 from August’s 50.4, while the new orders index fell to 50.0 from 50.6; new export orders also fell to 49.4 from 50.1. Nomura therefore believes the imbalance of strong supply and weak demand remains evident.
  • Price indices cool: the raw material purchase price index fell to 56.8 in October from 60.8 in September, while the output price index fell to 51.7 from 54.0. Nomura expects the industrial producer price index (PPI) to be flat month on month in October, below the 1.2% rise in September; however, the price indices fell less than the bank expected, leaving some modest upside risk to that forecast.

Where is the drag on non-manufacturing coming from?

  • The non-manufacturing PMI fell to 49.7 in October from 50.2 in September, below both the market and Nomura forecasts of 50.0. The services index edged down to 50.0 from 50.2, while the construction index fell to 48.0 from 50.3, returning to contraction territory.
  • The National Bureau of Statistics attributed the slowdown in services mainly to the financial sector; meanwhile, rail transport, accommodation, and cultural, sports and entertainment activities were strong during the National Day holiday. But the services new orders index fell to 45.2 from 46.7, indicating demand remains weak.
  • The previous expansion in construction was brief. In October, the new orders index fell to 40.0 from 45.7, and the expectations index fell to 52.3 from 55.4. Despite recent policies to promote investment, Nomura believes the construction downturn continues.
  • The non-manufacturing input price index fell to 52.4 from 54.0, while the selling price index rose to 48.9 from 48.5: costs are still rising and selling prices are still falling. Nomura believes pressure on profit margins has eased but has not disappeared.

Why does Nomura still expect GDP growth to rise in the fourth quarter?

  • Nomura expects a low base and some targeted policy support to further increase year-on-year growth in major economic activity data in October and lift GDP growth in the fourth quarter.
  • At the same time, the bank believes weak PMIs reflect still-soft underlying growth momentum, meaning improved year-on-year growth can coexist with currently insufficient demand.