Japan PMI worse, machine tool order backlog better

by SR on December 3, 2012

Markit/JMMA Japan PMI manufacturing

An intriguing contrast

Friday 30 November saw the release of the very timely Markit/JMMA Japan Manufacturing PMI™ for November 2012. The PMI fell from 46.9 in October to 46.5 in November. In its commentary, Markit noted that new orders fell to the greatest degree for 19 months. Presumably that is domestic orders as Markit commented that “new export orders also fell at a steeper pace”. Clearly, Japanese manufacturing is not yet out of the woods.

What I found interesting was the juxtaposition between Markit’s comment (“panellists operating in the capital goods sector registered the steepest falls in output, new orders and new export orders”) and the latest detailed figures from the Japan Machine Tool Builders Association. We commented on the flash figure for October a couple of weeks ago and suggested that given that the year-on-year change in cumulative orders has been stable for 5 months, maybe a bottom is being formed. This was the chart we showed you then:

Japan machine tool orders, year-on-year change in cumulative orders

What we need to be careful of here is the narrow scope of the JMTBA order numbers. This is a small sector, with monthly machine tools orders coming in at around 100 billion yen compared to the 1,500 to 2,000 billion in orders covered by the better-known ESRI survey every month. I like to track them because (a) machine tool orders tend to have long lead times (b) machine orders embody a clear element of capital investment. The JMTBA figures are also much more timely than the ESRI numbers, with machine tool orders typically being released within two weeks of the end of the month being reported.

Order backlog ticks up

Japan machine tool order backlog (billion yen)

Apart from this hint of stabilising orders, the other thing that caught my eye was the order backlog, which was disclosed as part of the detailed data released last week. (The JMTBA releases the core figures early but the full breakdown takes an extra 10-14 days to appear.) As you can see from the chart above, the order backlog ticked up in October, the first improvement after 4 consecutive months of contraction. Expansion in the order backlog is interesting because it suggests that orders are coming in more quickly than they can be turned around, which in turn implies higher activity.

We shouldn’t get carried away by this though, as the backlog increased by only 0.7%, which in seasonal terms is pretty poor for the month of October. And of course it is just one month. But look again at the chart above. See how the backlog fell for 15 consecutive months from July 2008 to September 2009? 2012 is clearly a poor year, but it’s not as bad as 2008 nor yet 2001-2002. We may be a few months off the bottom as yet, but I think we are getting close to that point. In an environment as tough as this one, we have to be grateful for small mercies – and quick to pounce on any signs that orders may no longer be getting worse.

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