The "first stage" of the economic momentum relay baton?

Abstract

Event: On September 30th, the National Bureau of Statistics announced the PMI index for September, with the manufacturing PMI at 49.8%, up from the previous value of 49.1%; and the non-manufacturing PMI at 50%, down from the previous value of 50.3%.

Key Points: The first stage is to hedge the risks of internal momentum with policy effects, and the second stage is to reverse the weak microeconomic expectations.

High-frequency indicators in September have improved, and the PMI has also shown positive changes. The recovery of emerging industries effectively offset the weakening of traditional industries. Although the September PMI readings are still in the contraction zone, the pace of contraction has slowed down. In terms of breakdown structure, the rebound in new orders and production indices is better than seasonal trends. Looking at industries, while traditional industries such as petrochemicals and black metallurgy showed weak high-frequency and PMI data in September, emerging industries such as pharmaceuticals, automobiles, electrical machinery, and electronic equipment have significantly improved in both high-frequency and PMI data.

Demand structure data shows that the economy is undergoing a transition in the "first stage," where policy effects are starting to hedge internal risks, manifested by the rebound in domestic orders offsetting the weakening of new export orders. In September, new export orders fell sharply by 1.2 percentage points to 47.5%, consistent with the weakening trend in PMI of developed countries like the United States in September. However, at the same time, domestic orders significantly rose by 1.3 percentage points to 50.3%, returning to the expansion zone above 50 since May.

Furthermore, looking at the breakdown of demand structure, PMI for consumption and equipment investment improved, offsetting the weakening PMI for infrastructure and real estate investment. In terms of the breakdown of industry structure for domestic performance, high-tech manufacturing, equipment manufacturing, and consumer goods PMI have all significantly improved and have been consistently above 50%, indicating support from large-scale equipment upgrades and policies promoting the replacement of old consumer goods. On the other hand, PMI for energy-intensive industries remains weak and still in the contraction zone, indicating corresponding suppression from the weakness in real estate investment and traditional infrastructure.

Weather factors led to a slight decline in the service industry PMI, while the construction industry PMI remained at a low level, indicating downward risks for traditional infrastructure and real estate investment. The service industry PMI fell by 0.3 percentage points to 49.9% in September, with a significant decline in the travel-related PMI. Meanwhile, although the construction industry PMI slightly rose by 0.1 percentage points to 50.7%, it still remained at one of the lowest levels this year.

Outlook: Policy intensification has been offsetting internal economic risks, the "first stage" may be unfolding, and it is necessary to continue monitoring the effects and sustainability of policies. The "second stage" requires attention to changes in microeconomic expectations. In September, there were two major changes in corporate expectations. Firstly, new orders and production indices showed significant improvement, but procurement volume continued to decline, widening the gap with the former two. Secondly, corporate production and operation expectations remained at the lowest level in two years. Looking ahead, as policies are further intensified, the subsequent effects need to be closely monitored. In addition to verifying economic growth indicators, changes in corporate and resident expectations also need to be tracked Regular Tracking: Improvement in Manufacturing Industry, Slight Decline in Non-Manufacturing PMI.

Manufacturing: Improvement in Manufacturing Industry, Significant Acceleration in Production Activities. In September, the manufacturing PMI rebounded seasonally, increasing by 0.7 percentage points to 49.8% month-on-month. Among the main sub-indices, the production index returned to the expansion range, rising marginally by 1.4 percentage points to 51.2%, providing the strongest support; the new orders index also saw a significant rebound, increasing by 1 percentage point to 49.9% month-on-month. Other indices such as raw material inventory and employment index showed improvement, and the supplier delivery index also made a positive contribution.

Weak external demand, rising raw material prices, and the need for improvement in enterprise procurement willingness. In September, the new export orders index experienced a significant decline, decreasing by 1.2 percentage points to 47.5% month-on-month, remaining in the contraction zone. Meanwhile, influenced by the rise in commodity prices, the purchasing prices of raw materials significantly increased, with the index rising by 1.9 percentage points to 45.1%. Under the dual impact of weak external demand and rising raw material prices, enterprise procurement willingness further decreased, with the purchasing quantity index decreasing by 0.2 percentage points to 47.6% month-on-month.

Non-Manufacturing: Service PMI Slightly Weakened, Dragging Non-Manufacturing PMI Down. In September, the service PMI decreased by 0.3 percentage points to 49.9% compared to the previous month, dragging the non-manufacturing PMI down marginally by 0.3 percentage points to 50%. Among the main sub-indices, the new orders index fell by 1.8 percentage points to 45% compared to the previous month. The construction industry slightly accelerated, with the construction PMI rising slightly by 0.1 percentage points to 50.7% compared to the previous month. Among the main sub-indices, the input price index increased by 2.4 percentage points to 50% month-on-month.

Report Content

On September 30th, the National Bureau of Statistics announced the PMI indices for September, with the manufacturing PMI at 49.8%, up from the previous value of 49.1%; and the non-manufacturing PMI at 50%, down from the previous value of 50.3%.

（I）Key Points: Policy Effects Starting to Offset Endogenous Risks

High-frequency indicators improved in September, and the PMI also showed positive changes, with the recovery in emerging industries effectively offsetting the weakness in traditional industries. The manufacturing PMI in September rose by 0.7 percentage points to 49.8% compared to August. As the PMI is a month-on-month indicator, although the September reading still indicates a contraction in economic activity, the pace of contraction has slowed down. Looking at the breakdown, the new orders index rose by 1 percentage point to 49.9%, showing a significant improvement compared to the same period in previous years (+0.4 percentage points). The production index increased by 1.4 percentage points to 51.2%, also showing a better improvement compared to the same period in previous years. Despite the weak performance of traditional industries such as petrochemicals and black metallurgy in September, both in high-frequency data and PMI, the improvement in high-frequency data and PMI in emerging industries such as pharmaceuticals, automobiles, electrical machinery, and computer communication electronic equipment effectively offset the weakness

Demand structure data shows that economic momentum is undergoing a "first-stage" transformation, where policy effects are starting to offset endogenous risks. One manifestation is the rebound in domestic demand orders offsetting the weakening of new export orders. Looking at the demand structure, new export orders in September fell significantly by 1.2 percentage points to 47.5%. The manufacturing PMI in developed countries such as the United States in September also weakened significantly, further slowing external demand, with the impact of external sanctions on exports beginning to show. However, at the same time, domestic demand orders significantly rose by 1.3 percentage points to 50.3%, returning to the expansion zone above 50 since May.

Looking at the demand sub-structure, consumer and equipment investment PMIs improved, offsetting the sluggishness in infrastructure and real estate investment PMIs. Breaking down the performance of domestic demand by industry structure, the PMIs of high-tech manufacturing, equipment manufacturing, and consumer goods improved by 1.3, 0.8, and 1.1 percentage points to 53%, 52%, and 51.1% respectively, showing support for large-scale equipment upgrades and policies promoting the replacement of old consumer goods with new ones. However, the PMI of energy-intensive industries only slightly rose by 0.2 percentage points to 46.6%, still in the contraction zone below 50%, indicating continued weakness in real estate investment and traditional infrastructure.

Weather factors led to a slight weakening in the service industry PMI, while the construction industry PMI remained at a low level, indicating continued downside risks for traditional infrastructure and real estate investment. The service industry PMI in September fell by 0.3 percentage points to 49.9% due to the end of the peak summer travel season and the impact of extreme weather such as typhoons in some regions. Business activity indices in industries such as railway transportation, water transportation, and cultural, sports, and entertainment activities all fell significantly into the contraction zone. Meanwhile, although the construction industry PMI slightly rose by 0.1 percentage points to 50.7%, it remained at the second-lowest level so far this year.

Outlook for the Future: Policy reinforcement has been hedging economic endogenous risks, the "first phase" may begin to unfold, and it is necessary to continue tracking the effectiveness and sustainability of the policies. The "second phase" requires attention to changes in microeconomic expectations. Although the manufacturing PMI in September has improved positively, there have been two major changes in corporate expectations. Firstly, new orders and production index have significantly rebounded, but procurement volume continues to decline, continuing the trend of staying below new orders since June. Secondly, corporate production and operation expectations remain at the lowest level in two years. Looking ahead, the effects of the previous stable growth policies are gradually showing, and recent policies have been reinforced again to hedge against the downward risks in exports, traditional infrastructure, and real estate. However, the subsequent effects of the policies still need further tracking, especially the impact on corporate and resident expectations.

(II) Regular Tracking: Improvement in Manufacturing Industry, Slight Decline in Non-Manufacturing PMI

Manufacturing Industry: Improvement in manufacturing industry, production activities significantly accelerated. In September, the manufacturing PMI rebounded beyond seasonal trends, increasing by 0.7 percentage points to 49.8% month-on-month; over the past 5 years, the September manufacturing PMI has often seen rebounds, with an average increase of 0.3 percentage points. Among the main sub-indices, the production index returned to the expansion zone, rising marginally by 1.4 percentage points to 51.2%, providing the strongest support; the new orders index also saw a significant increase, rising by 1 percentage point to 49.9% month-on-month. Other indices such as raw material inventory and employment index have improved, increasing by 0.1 percentage points each to 47.7% and 48.2% respectively. The supplier delivery index made a positive contribution, decreasing by 0.1 percentage points to 49.5% month-on-month.

Drag from external demand, rise in raw material prices, and enterprise procurement willingness awaiting recovery. In September, the new export orders index experienced a significant decline, decreasing by 1.2 percentage points to 47.5% month-on-month, remaining in the contraction zone; the backlog of orders index also showed weakness, declining by 0.7 percentage points from the previous month to 44%. Meanwhile, influenced by factors such as the rise in commodity prices, the purchase prices of raw materials significantly increased, with the index rising by 1.9 percentage points to 45.1% marginally. Under the dual impact of drag from external demand and rise in raw material prices, enterprise procurement willingness further decreased, with the procurement volume index decreasing by 0.2 percentage points to 47.6% month-on-month.

Non-Manufacturing Sector: Service PMI Slightly Weakened, Dragging Down Non-Manufacturing PMI. In September, the service PMI decreased by 0.3 percentage points from the previous month to 49.9%, dragging down the non-manufacturing PMI by 0.3 percentage points to 50%. Among the sub-industries, due to the end of the peak summer travel season and extreme weather conditions such as typhoons affecting some regions, the business activity index of industries such as railway transportation, water transportation, and cultural sports and entertainment experienced a significant decline, all falling into the contraction zone; while the business activity index of industries such as postal services, information technology services, and monetary financial services remained above 55.0%, indicating a relatively high prosperity level. In addition, the construction industry saw a slight acceleration in production, with the construction PMI increasing by 0.1 percentage points from the previous month to 50.7%.

End of Summer Season and Weather Disturbances Lead to Significant Decline in New Orders Index for the Service Sector. In September, among the main sub-indices of the service sector, the new orders index fell by 1.8 percentage points from the previous month to 45%; input prices and sales prices continued to decline, decreasing by 0.9 and 1.4 percentage points to 47.9% and 45.7% respectively. Looking at specific industries, with the end of summer travel in September and some regions affected by extreme weather conditions such as typhoons, the travel prosperity of railway transportation and water transportation industries significantly declined; high-frequency data on inter-regional travel showed a 22.7% month-on-month decrease in the national migration index in September. In contrast, the postal industry saw an upward trend in business activity, with a 8.5% increase in express collection volume compared to the previous month.

Construction input prices significantly rose, while the new orders index continued to decline. In September, among the main sub-indices of the construction industry, the input prices index significantly increased by 2.4 percentage points to 50%, making a major contribution; indicators such as the South China black price provided some evidence, with the average price index in September showing a significant increase from the previous month. In comparison, the new orders index and the number of employees index continued to decline, decreasing by 4 and 1 percentage points to 39.5% and 40% respectively compared to the previous month. High-frequency indicators show that the grinding start rate and asphalt start rate, which reflect changes in the construction industry's prosperity in September, are at historically low levels compared to the same period in recent years

Authors of this article: Zhao Wei (Certificate Number: A0230524070010), Tu Qiang (A0230521070002), Source: Shenwan Hongyuan Macro, Original Title: "The 'First Stage' of Economic Momentum Relay Baton?"