Manufacturing Downturn Deepens As Indicator Dips to Lowest Since October 2011

September 04, 2012 /

Italy’s manufacturing sector remained deep in recession during August, as highlighted by the seasonally adjusted Markit/ADACI Purchasing Managers’ Index (PMI) – a composite indicator designed to gauge manufacturing performance.

The PMI fell to a ten-month low of 43.6, from 44.3 in July. Factors that weighed on the headline number were faster contractions in output, new business and employment, as well as a more marked improvement in supplier delivery performance.

Phil Smith, economist at Markit and author of the Italian Manufacturing PMI said: “Output levels again dropped sharply on an accelerated contraction in new orders, which suggested that the sector will weigh heavily on GDP in the third quarter.”

Italian manufacturing output fell sharply in August, with the rate of decline the fastest since last November. That extended the current sequence of contraction in the sector to 11 months.

Businesses that recorded lower production levels compared with the previous month commonly linked this to fewer intakes of new orders, which fell at the fastest pace for three months. Anecdotal evidence cited a lack of liquidity, lower demand and destocking at clients as reasons behind the reduction in new work.

New export orders placed with Italian manufacturers also decreased at a sharper rate in August – the steepest for eight months. That said, the drop in international new business was noticeably weaker than the decrease in total new orders, indicating that the domestic market remained the key factor behind the downturn.

Manufacturers in Italy responded to reductions in new orders and output by cutting staff numbers for the thirteenth month in a row during August. Moreover, employment fell at the fastest rate for three years. Backlogs of work also decreased as a consequence of the weakening trend in new orders, though the rate of reduction was the slowest in over a year.

Input buying within the manufacturing sector decreased at a sharp and accelerated rate during August, contributing to a further (albeit weaker) reduction in stocks of purchases. Post-production inventory levels meanwhile stabilised, having fallen solidly one month previously. According to anecdotal evidence, weaker-than-expected sales offset firms’ attempts to streamline stocks of finished goods in line with lower demand.

Lower purchasing activity also led to a sixth straight monthly shortening of vendor lead-times in August. The overall improvement in supplier performance was the most marked in over three years.

Italian manufacturers registered a further decrease in average input prices in August, and primarily attributed this to reductions in the costs of a number of raw materials. The overall fall in purchasing costs was, however, weaker than in each of the previous two months, and only modest. In contrast, factory gate prices fell at the fastest pace in the current seven-month sequence of decline.

“Further decreases in input prices and a shortening of suppliers’ delivery times meanwhile pointed to weakness feeding through into supply chains, the former development providing some respite to manufacturers looking to gain a competitive advantage through discounting,” Smith said.

 

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