Manufacturing posts slight increase in August despite headwinds

The Philippine manufacturing sector posted a slight increase in August, although headwinds persist from runaway inflation and supply chain disruptions, S&P said in its latest Global Philippines Manufacturing PMI.

This is the seventh consecutive month the manufacturing sector posted above the 50.0 no-change mark that separates growth from contraction for the seventh month running, with the latest reading improving marginally from 50.8 in July to 51.2 in August.

"August PMI data signaled an improvement in operating conditions across the Philippines manufacturing sector. Encouragingly, employment increased strongly, and at the sharpest pace since mid-2017," Maryam Baluch, an S&P Global Market Intelligence economist, said.

While this signaled a more robust improvement in the sector's health, the uptick was weaker than the series average.

Output Index stabilized after contracting for the first time in six months during July.

"Moreover, the rate of contraction in new orders softened in the latest survey period, with firms reporting only a marginal decrease in client demand overall," S&P Global said.

However, total sales were weighed down by a sharper decrease in new export orders, as foreign customer demand fell at the steepest rate since January.

"However, growing downside risks to the growth challenge the sector. Already we have seen output failing to expand during the latest survey period and factory orders falling for the second consecutive month. Furthermore, price pressures remained persistently high," Baluch added.

On the employment front, substantial gains in workforce numbers helped boost the latest headline PMI figure during August.

Firms hired additional staff for the fourth consecutive month as firms hoped for expansion in production in the coming months. Additionally, the rate of job creation was the fastest since June 2017.

That said, lower new order inflows led to firms cutting back on purchasing activity during August. While the rate of contraction was only mild, it marked the first reduction in input buying since January.

Despite increasing for a year, stocks of raw materials and semi-finished items rose at the softest pace since October 2021, with the rate of increase easing for the fourth month.

Growth in post-production inventories showed a similar story, as stocks rose at the weakest pace in the current accumulation run that began in February. The softer increases in inventories reflected weak client demand.

"Headwinds heighten concerns that inflationary pressures, supply chain disruptions, the weakening of the peso, and a high-interest rate environment, with further hikes expected, will squeeze demand as clients' disposable income will take a hit," Baluch added.

Meanwhile, supply-chain disruptions intensified during August, with lead times lengthening to the greatest extent in five months.

Shipment delays and port congestion were predominately cited by respondents as the leading causes of delivery delays.

Supply-side disturbances and rising energy and material prices exerted upward pressure on operating expenses in August. As a result, purchasing costs have now been increased each month since May 2020, the S&P said.

"Firms reported a rapid increase in input prices that were among the sharpest on record, albeit softer than that seen in July," it added.

In line with rising average cost burdens, firms increased their factory gate charges further in August, extending the current selling price inflation sequence that began in May 2020.

Moreover, the rate of charge inflation was the quickest in five months.

Lastly, sentiment across manufacturing firms in the Philippines remained strongly positive during August, with around half of survey respondents hopeful of an expansion in output in the coming 12 months.

However, the degree of confidence posted second-lowest in seven months and was subdued in the context of the series' history.

"While the Filipino economy showed strong growth post-COVID-19, the following months will challenge momentum, with the PMI data already recording softer output expectations for the year ahead," Baluch said.