Managing the economic implications based on the first quarter PMI

THE first quarter of 2024 showed a complex economic landscape for the Philippines, as reflected in the Purchasing Managers’ Index (PMI) reports from January to March. These reports are managed by the Philippine Institute for Supply Management (PISM), the Foundation of the Society of Fellows in Supply Management (SOFSM) and I-Metrics Asia-Pacific Corp. and provide valuable insights into economic activities in different sectors. Here we dive into a comprehensive analysis of these findings, examining the nuances of the economic dynamics that have shaped the start of 2024.

Overview of PMI performance

The PMI, a crucial indicator of economic health, has shown varying trends across the manufacturing, retail-wholesale and services sectors. The performance of each sector provides a snapshot of broader economic trends, with implications for employment, supply chain efficiency, pricing strategies and overall economic growth.

Manufacturing sector

Trend. The manufacturing sector showed resilience with a steady increase in PMI from January to March. Despite global uncertainties and local challenges such as changes in consumer demand and supply chain disruptions, the industry showed improvements in supplier delivery times, indicative of a more efficient supply chain. These efficiencies are likely to come from reduced demand pressure or improvements in supply chain logistics.

The sector has faced an upward trend in both production costs and sales prices, due to continued pressure from raw material costs and operating costs.

Essentials. Notably, the manufacturing PMI rose to 52.14 in March from previous figures, indicating stronger-than-expected productivity and business confidence. This rebound was supported by expansions in production volumes and new orders, which offset the reduction in lead times and expansion in inventory levels.

In March, the lead time for supplier deliveries in manufacturing shrank to 48.28, indicating faster delivery times than in previous months. This improvement suggests that manufacturers are receiving their inputs more quickly, which can improve production lead time and reduce inventory costs.

The production cost index rose to 52.86 in March, indicating an increase in input costs, likely due to global commodity prices and local supply chain inefficiencies. At the same time, the retail price index also rose to 51.37, indicating that manufacturers are passing on some of these costs to consumers to maintain margins.

Retail, wholesale

Trend. The retail and wholesale sectors faced more pronounced challenges. The PMI showed mixed signals, with issues in supply chain efficiency and inventory management. In contrast to the gains in manufacturing, the sector has faced continued challenges in supply chain management. Issues such as delays in supplier deliveries have impacted companies’ ability to maintain optimal inventory levels.

It also faced difficulties in matching rising acquisition costs with sales prices, challenging profitability and competitive pricing strategies.

Essentials. March saw a particularly sharp decline in the sector PMI. The retail and wholesale lead time index rose to 51.28 in March, reflecting slower deliveries compared to the manufacturing sector. This slowdown can be attributed to increased demand that suppliers are finding difficult to meet or inefficiencies within supply logistics.

The acquisition cost index rose, indicating higher costs faced by retailers. However, the sales price index fell slightly to 51.72, underscoring the struggle to fully pass these costs on to consumers. This mismatch poses risks to profitability, especially in a competitive market where pricing power is limited.

Service sector

Trend. In contrast to the usual seasonal slowdown, the services sector showed unexpected growth this quarter. The PMI remained above the 50-point threshold, indicating expansion. The services sector is less directly affected by supply chain fluctuations than the manufacturing and retail sectors, but feels the effects indirectly through operational costs and speed of service.

The services sector showed an increase in operating costs without a corresponding increase in service costs, indicating that service providers’ profit margins were under pressure.

Essentials. Resilience in the services sector was particularly evident in March, when the PMI rose to 51.76, driven by strong underlying demand and efficient operational adjustments. This sector benefited from robust activity in areas such as information technology and tourism, which offset weaker periods.

Operating costs continued to rise, reflected in an index increase to 53.25 in March. However, the price charge index dropped significantly to 50.25, indicating that services are absorbing some cost increases to maintain competitive service rates and attract customer volume.

Economic prospects

For the manufacturing sector, continued improvements in supply chain logistics can further increase production capabilities. However, monitoring global commodity prices and local supply disruptions will be critical as these can impact production costs and margins.

If retailers and wholesalers do not address these supply chain and pricing strategy issues, the problem may persist. Investments in technology to improve inventory management and adjustments to pricing strategies may be necessary to prevent further erosion of profit margins.

While the manufacturing sector showed a slowdown in employment growth, the services sector was more resilient. Employment trends will need to be closely monitored as they will impact consumer spending and economic growth.

Strategic recommendations

For policy makers. There is a critical need for infrastructure improvements and policies that enable faster and more reliable supply chain logistics, especially for retail and wholesale.

There is a need for targeted support to sectors where the misalignment of prices and costs threatens the sustainability of companies. Initiatives may include subsidies, tax credits, or support for technology upgrades to improve efficiency and reduce operating costs. Improvements in road, port and digital infrastructure can significantly reduce lead times.

For companies. Companies from all industries need to invest in technology to improve operational efficiency and supply chain management. In addition, diversifying supply sources and improving workforce training programs can help limit sector-specific risks.

Companies must improve their cost management and pricing analytics to respond dynamically to changing cost structures and market conditions. Applying advanced analytics and artificial intelligence can provide predictive insights into cost movements and help build competitive yet profitable pricing strategies.

Retailers and wholesalers may need to rethink their inventory and logistics strategies. Implementing just-in-time inventory systems or investing in technology to better predict demand and dynamically adjust supply chains could alleviate some of the challenges experienced.

The first quarter of 2024 has exposed the strengths and weaknesses of the Philippine supply chain. If the country is to maintain economic stability and growth, it will be essential to equalize the performance of these sectors through strategic interventions.

Stakeholders across the spectrum must work together to promote a more resilient and responsive supply chain environment. Adaptability to cost changes and strategic pricing will also be critical determinants of success in the Philippines’ evolving economic environment.