Japan's manufacturing sector experienced a broad-based slowdown in May

Photo by Adam Pretty/Getty Images

Activity levels across Japan’s manufacturing sector improved at a slower pace in May, according to the lastest Nikkei-IHS Markit “flash” manufacturing purchasing managers index (PMI) released today.

The headline PMI came in at 52.0, down from 52.7 in April. It was a six-month low.

Source: IHS Markit

The PMI measures changes in activity levels across Japan’s manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests that they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

The flash reading, released one week before the final PMI report, is based off around 85-90% of survey responses, and is generally a pretty accurate guide as to how the final figure will print.

This table from IHS Markit shows how individual components within the May survey fared.

Source: IHS-Markit

While most came in above 50 — indicating that activity levels continued to improve — there was a clear deceleration compared to the levels reported in April.

Of note, output grew at a slower pace while new orders and new export orders — lead indicators on activity levels in the months ahead — also grew at a slower pace than April.

Fitting with the deceleration in activity levels, order backlogs declined after several months of growth while hiring levels and stock purchases also moderated.

Input and output prices also grew at a slower pace, suggesting that inflationary pressures across the sector may be already starting to ebb.

“May’s PMI data signalled a broad-based slowdown in growth of the manufacturing sector, with output, new orders and employment all rising at their slowest rates since last November,” said Paul Smith, senior economist at IHS Markit

“Although growth is being maintained at a decent clip, reports of ‘wait-and-see’ attitudes amongst clients, excess warehouse inventories and recent sharp rises in raw material costs all served to undermine expansion during the month.”

While not a horrible report — activity levels still improved albeit at a slower pace — it suggests that activity levels across the global manufacturing sector may be starting to moderate after a strong rebound from the middle of last year.

Markets will be looking for confirmation as to whether or not that is the case with IHS Markit due to release flash manufacturing and services PMI reports for the Eurozone, Germany, France and the United States later in the session.

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