Recent data show manufacturing activity is no longer cooling but has also not yet shown signs of heating up, according to a “heat map” prepared by Itaú Unibanco. According to the new indicator, manufacturing output has been stabilizing in the last few months after a cycle of decline seen in 2015 and so far this year. During the third quarter, 70% of manufacturing segments had performance classified as “neutral.”
In order to analyze the sectoral evolution of manufacturing, Itaú Unibanco analysts built a “heat map” showing output performance from several segments in colors ranging from very weak (dark blue) to dark orange (very strong), including weak (light blue), neutral (yellow) and strong (light orange).
In the third quarter, 16 out of 23 sectors reviewed had a neutral result, including automotive vehicles, other chemicals, machines and equipment, pulp and paper, and electrical material and equipment. One segment (equivalent to 4% of the sample), metalwork, had a strong performance while 13% showed a weak performance (beverages, tobacco, and construction material) and another 13% were very weak (food, oil products, biofuels and non-metallic minerals).
“The idea is to draw a map that monitors the evolution of manufacturing production in several sectors. Data from the Monthly Industrial Survey of the IBGE [Brazilian Institute of Geography and Statistics] allow a view of the performance of subcategories,” Itaú Unibanco economist Laura Pitta says. According to the report, the most recent results show a clear stabilization trend, although there aren’t evident signs of recovery.
Economist Felipe Salles says manufacturing is reaching a turning point. “It still isn’t growing, but it stopped shrinking,” he says. “It’s what is called a turning point. From now on, we will probably see some growth where there was decline before.”
At this point in the cycle data naturally fluctuates a bit more, Mr. Salles says. “Output grows, then disappoints, falls, then it improves again,” he says. Summing it up, manufacturing is in a stage of stabilization and soon a recovery phase will start, he says. “Looking a bit further, it’s safe to say that: manufacturing has tended to stabilize since March.”
By discussing manufacturing prospects, the study says that “cyclical inventory adjustments, which were ongoing in the last few months, should continue since demand remains above output.” Together with the expectations of continuity in the monetary-easing cycle, this picture “indicates a scenario of manufacturing growth from now on.” Itaú Unibanco predicts a reduction of 0.25 percentage points at the Monetary Policy Committee (Copom) meeting scheduled for the end of November, taking the Selica policy rate to 13.75%. Rates could fall more steeply throughout 2017 and reach 10% later in the year, the bank says.
The “heat map” index seeks to measure the most recent behavior of each sector, providing a score for each month’s variation. The score ranges from -2 to 2 “depending on the magnitude of the movement in comparison to historical performance.” To eliminate volatility, the model uses quarterly fluctuations for each manufacturing sector to try and “capture the trend.” The August indicator, for instance, compared the June-August output with the February-May period.
In fact, the “heat map” for the three months ending in August showed a picture with more sectors improving. There was 13% of sectors with a performance classified as very strong, 22% as very strong and 48% as neutral, in addition to 9% classified as weak and another 9% as very weak.
But wouldn’t the three-month result to September indicate that manufacturing is weakening? “This volatility of results is characteristic of cycle turning points and doesn’t mean a change of trend,” Ms. Pitta says.
Manufacturing production rose in all months between March and June in comparison to the previous month, after seasonal adjustments. It dropped slightly in June, at 0.1%, and fell further in August with a 3.5% drop. Manufacturing started rising again in September, growing 0.5%. But such indicators as vehicle output, heavy vehicle traffic on toll roads and cement output fell again in October. Itaú Unibanco forecasts a 1.2% drop from September in the seasonally adjusted series.
The bank forecasts a 6.7% decline in manufacturing this year, and 5% growth in 2017.
Source: Valor Econômico S.A.