The seasonally adjusted Barclays Purchasing Managers’ Index (PMI) declined by 6.2 index points to reach 46.3 in August 2016. The magnitude of the drop was somewhat surprising after the PMI managed to remain above the neutral 50-point mark during the preceding five months. The decline was driven by a steep fall in the new sales orders index and a second straight monthly decline in the business activity index.

Both of these indices are now well below the neutral 50-point mark. However, the majority of respondents indicated that sales orders and output levels were unchanged compared to the previous month rather than down. This suggests that activity may be largely flat compared to July instead of sharply lower.

Despite the big drop in the headline PMI, there were some encouraging signs that the deterioration may have been temporary. The employment index remained just above 50, which could suggest that purchasing managers expect activity to pick up again and in anticipation kept employment levels steady. Indeed, purchasing managers were the most optimistic about expected business conditions in about a year. The index measuring expected business conditions in six months’ time rose to 61.5 index points from 55.4 previously.

The second consecutive decline in the price index was likely also welcomed by manufacturers. The stronger rand exchange rate (in the first three weeks of the month) and the hefty fuel price decline at the start of the month likely contributed to slower cost increases. However, renewed rand weakness in the final week of August (if sustained) means that upward cost pressure could return in coming months.