Brazil manufacturing PMI slips 2.0 points to 55.8

Brazil’s manufacturing economy expanded at a marked rate in February, although growth cooled following January’s series-record performance. Both output and new orders grew strongly, while job creation accelerated again. However, there was further evidence of rising price pressures, as higher demand for raw materials, capacity constraints at suppliers and unfavorable exchange rates pushed up input prices.

The headline seasonally adjusted Brazil Manufacturing Purchasing Managers’ Index slipped from January’s survey high of 57.8 to 55.8 in February. The drop represented a weaker expansion of the sector. Nevertheless, the latest reading signaled a marked improvement in operating conditions.

Total incoming new business expanded for the seventh month running in February, although the latest increase was the mildest since last October. Both domestic and foreign sales rose on the month, however data showed that the former remained the primary driver of overall new order growth. Anecdotal evidence suggested that a combination of better global economic conditions and successful promotional activities underpinned gains in new work.

Backlogs continued to build at Brazilian manufacturers as workloads increased during the second month of 2010, suggesting pressure on operating capacity. Correspondingly, output rose at a slightly slower pace than new orders.

Employment and buying activity were raised in February – both to accommodate current production requirements and in anticipation of improved demand going forward. Staffing increased at a firm pace that was the fastest since October 2007, while raw material purchases grew markedly (albeit more slowly than over the previous two months).

Stronger demand for raw materials led to longer lead times, as suppliers faced capacity constraints. Vendor performance has now deteriorated for seven consecutive months.

Input stocks were broadly unchanged on the month. Where inventories fell, this was mainly attributed to delays on raw material deliveries. Meanwhile, larger holdings were linked to efforts to re-stock amid an improving business environment.

Input price inflation accelerated to a considerable pace during the latest survey period. Firms noted greater prices for raw material and a weak real against the U.S. dollar. Favorable demand conditions enabled manufacturers to pass on part of these cost increases to customers by way of higher charges. Output prices rose for the fifth month running, although the latest increase was only moderate and below the pre-downturn trend.

Commenting on the Brazil Manufacturing PMI survey, Andre Loes, chief economist for Brazil at HSBC, said: “Falling to 55.8 in February from a record level of 57.8 in January, the HSBC Manufacturing PMI indicated a slowdown in the pace of expansion of Brazil's manufacturing industry. Nevertheless, the current reading, which is on a par with December's, still signalled a strong improvement in economic conditions. The output and new orders components continue to show strong growth, with benign implications for job creation - the employment component continued to indicate accelerating growth. All in, February's Brazil Manufacturing PMI survey continues to suggest that the BCB is right to be concerned with the inherent risks of this scenario. The combination of strong manufacturing activity with improving labour markets intensifies the inflationary risks of an environment which already shows price and capacity pressures at both companies and suppliers.”