Taiwan’s purchasing managers index (PMI) slid to 49.9 last month from 54.9 in May, falling below the neutral line of 50 for the first time in eight months, as firms cut orders to first deal with excessive inventory at home, according to an HSBC PLC report released yesterday.
The latest PMI reading, a bellwether of national manufacturing activity, suggests a sub-seasonal third quarter for the technology sector despite the arrival of the high season.
“The dip was brought about largely by an inventory correction, which will continue to drag down new domestic orders for a few more months,” said Donna Kwok (郭浩庄), an economist at HSBC Asia.
A PMI score above 50 indicates expansion, while a lower reading suggest a contraction. The last time the gauge dropped below the threshold was October last year, when it stayed there for three straight months.
The new orders sub-index, an indicator of incoming new business flows from local and foreign buyers, eased to 49.8, from 55.2 a month earlier, ending six months of expansion.
Weaker domestic demand was cited as the main culprit as the sub-index for new export orders remained at 50.2 last month, though still down from 54.9 in May, the report said.
Domestic inventory levels relative to shipments have been rising since Japan’s earthquake and tsunami on March 11 as Taiwanese manufacturers rushed to stock up on component inventory, the report found.
“This is now translating into temporarily softer demand at home,” Kwok said.
The HSBC report echoed the observation by UBS Taiwan that seasonality would be less important going forward as high channel inventory and weak end-demand would suppress corporate earnings this quarter.
Softer demand also accounted for falling backlogs of work as the sub-index posted 47.9 last month, from 51.3 in May, the report said. However, slackening manufacturing did not stop firms from passing costs on as input and output price sub-indexes declined to 48.2 and 50.4 last month, from 59.5 and 54.9 respectively one month earlier, the report found.
This is the first time in two years that the input reading has dropped below the 50 mark, indicating “businesses are starting to transfer all, if not more, of their price pressures to end consumers,” Kwok said.
The employment sub-index also retreated into the contraction zone at 48.2 last month, from 52.2 in May, amid cooling business activity, the report said.
Given the recent positive turn in trade data from all of Asia’s leading indicators, Kwok said the impact of the inventory excess should be ironed out this quarter.
However, if inventory is not used up and staffing demand continues to weaken, Taiwan’s export-focused economy could suffer because “domestic demand recovery remains delicate as a result of a lack of significant wage growth,” the economist said.
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