Why did the PMI for the construction and service industries see a significant rebound in December?

In December, the manufacturing PMI data changed little, with notable fluctuations in the construction and service industries.

(1) Why did the construction PMI rebound significantly? This can be broken down into three points.

1) The rebound in construction business activity may be more attributed to the recovery in residential construction. For infrastructure, according to the China Federation of Logistics and Purchasing (CFLP), "In December, the business activity index for the civil engineering construction industry was above 52%. In November, although the business activity index for civil engineering construction decreased from the previous month, it remained at a high level above 52%." Regarding residential construction, the CFLP noted, "In December, the business activity index for the residential construction industry was above 52%. In November, the business activity indices for residential construction and construction decoration and installation were both below 50%."

2) The rebound in residential construction business activity may be related to ensuring the delivery of buildings. From the comparison over the past two years, the business activity index for residential construction in December is not considered high, and real estate investment may still face pressure. According to the CFLP, "In December, there were signs of improvement in activities related to ensuring the delivery of buildings." Similar occurrences were noted earlier in 2023, such as in November 2023, "The business activity indices for the residential construction and construction decoration industries both showed significant increases from the previous month, remaining above 54%, reflecting the acceleration of activities related to ensuring the delivery of buildings." In absolute terms, the business activity index for residential construction at 52% during 2023-2024 may not be considered high.

3) The rebound in the construction order index may mainly come from infrastructure, similar to December of last year. According to the CFLP, "At the same time, positive changes have also emerged on the demand side. By industry, the new order index for residential construction rose above 50%, and the new order index for civil engineering construction rose above 53%." Last December, following the completion of the issuance of additional national bonds, there was also a noticeable rebound in orders.

(2) Why did the service PMI rebound significantly? This can also be broken down into three points.

1) Various transportation activities are booming, possibly influenced by export competition. From the high-frequency data in December, the volume of freight traffic on highways, port cargo throughput, port container throughput, freight flight schedules, and international freight flight schedules all showed significant year-on-year improvements compared to November. From the PMI new export orders, new export orders have risen for two consecutive months. "Among them, the new export order index for consumer goods manufacturing also rose more than 2 percentage points from the previous month to above 50%, indicating a recovery in consumer goods exports in December."

2) The retail sector is recovering, and offline consumption may be improving. According to the CFLP, "The retail business activity index rose above 50%." A similar situation occurred in September, as noted by the CFLP in September, "The retail business activity index has risen for three consecutive months, reaching above 51% in September, indicating that residents' offline consumption continues to expand." The recovery of the retail industry is often accompanied by a rebound in the manufacturing PMI of consumer goods. In December, the manufacturing PMI of consumer goods rose to 51.4%, up from 51.1% in September.

3) The financial industry maintains high prosperity, and the growth rate of social financing may remain stable. According to the China Federation of Logistics and Purchasing (CFLP) interpretation, "In December 2024, both the business activity index and new orders index of the financial industry achieved a month-on-month increase for two consecutive months, both above 60%. The prosperity of the financial industry experienced a significant decline in April. From the social financing data, the growth rate of social financing stock dropped to 8.3% in April, down from 8.7% previously."

Report Body

I. Dissection of Two Anomalies

(1) Why did the construction PMI rise significantly?

The first anomaly comes from the construction industry. In December, the business activity index for the construction industry was 53.2%, an increase of 3.5 percentage points from the previous month, and the new orders index for the construction industry was 51.4%, an increase of 7.9 percentage points from the previous month. This can be dissected into three points.

1) The rebound in construction business activity may be more attributed to the recovery in residential construction. For infrastructure, observing the business activity index of the civil engineering construction industry, according to the CFLP interpretation, "In December, the business activity index of the civil engineering construction industry was above 52%. Although the index decreased in November compared to the previous month, it remained at a high level above 52%." For residential construction, observing the business activity index of the housing construction industry, according to the CFLP interpretation, "In December, the business activity index of the housing construction industry was above 52%. In November, both the housing construction and construction decoration and installation industries had business activity indices below 50%."

2) The rebound in residential construction business activity may be related to the guarantee of delivery. From the comparison over the past two years, the business activity index for residential construction in December is not considered high, and real estate investment may still face pressure. According to the CFLP interpretation, "In December, by industry, the business activity indices of the housing construction and civil engineering construction industries were both above 52%, indicating that the guarantee of delivery and infrastructure activities are improving." The impact of the guarantee of delivery has driven the rise in the residential construction index, which also occurred in 2023. For example, in November 2023, "the business activity indices of the housing construction and construction decoration industries both showed significant increases, both above 54%, reflecting that activities related to the guarantee of delivery are accelerating." In absolute index terms, during the period from 2023 to 2024, a business activity index of 52% for residential construction may not be considered high. For instance, in March 2023 (above 55%), May 2023 (above 55%), September 2023 (above 56%), November 2023 (above 54%), March 2024 (above 53%), and June 2024 (above 52%).

3) The rise in the construction order index may mainly come from infrastructure, similar to December last year. According to the CFLP interpretation, "At the same time, positive changes have also occurred on the demand side. By industry, the new orders index for the housing construction industry rose to above 50%, and the new orders index for the civil engineering construction industry rose to above 53% "In December last year, as the issuance of additional national bonds was completed, there was a noticeable rebound in orders. The construction industry PMI new orders index for December 2023 was 50.6%, up from 48.6% in November 2023. According to the China Federation of Logistics and Purchasing (CFLP) interpretation, 'the data shows that the supply and demand activities in the construction industry continue to improve, indicating that investment demand is accelerating towards the end of the year.' By industry, the business activity index and new orders index for the housing construction and civil engineering sectors both increased compared to the previous month, with 'the index increase in civil engineering being more pronounced, showing that infrastructure investment continues to gain momentum.'"

(2) Why did the services PMI rise significantly?

In December, the services business activity index was 52.0%, an increase of 1.9 percentage points from the previous month, reaching the highest point since April. The reasons may be related to three factors.

1) Retail rebound. According to the CFLP interpretation, 'the retail business activity index rose above 50%.' A similar situation occurred in September, where the CFLP noted, 'the retail business activity index rose for three consecutive months, reaching above 51% in September, indicating that offline consumption by residents continues to expand.'

The rebound in retail is often accompanied by a rise in the PMI of the consumer goods manufacturing sector. In December, the consumer goods manufacturing PMI rose to 51.4%, up from 51.1% in September. According to the CFLP interpretation, 'structurally, the growth in consumer goods market demand is particularly remarkable, with the 'two new' policies injecting strong momentum into the consumer market. Coupled with the approaching year-end consumption peak, the growth rate of market demand for consumer goods manufacturing has significantly accelerated, which is the main force supporting the overall recovery of demand. The new orders index for consumer goods manufacturing rose nearly 1 percentage point from the previous month to above 53%, a relatively good level.'

2) High prosperity in the financial sector. According to the CFLP interpretation, 'in December 2024, both the financial business activity index and new orders index achieved a consecutive two-month month-on-month increase, both remaining above 60%. In the fourth quarter, the average business activity index and new orders index for the financial sector were both above 55%, showing a significant improvement compared to the third quarter. As the moderately loose monetary policy gradually takes effect, the support of finance for the real economy will continue to strengthen, and the content of support will continue to deepen.' According to the National Bureau of Statistics interpretation, 'the business activity index for monetary financial services, insurance, and other industries has risen to above 60%, indicating a high prosperity range.' The prosperity of the financial industry experienced a significant decline in April. According to the China Purchasing Managers' Index (PMI) interpretation for April, "the banking industry... after the concentrated release of corporate procurement demand and funding demand in March, the growth rate of business activities has adjusted, which is the main factor leading to the overall slowdown of non-manufacturing growth." From the social financing data, the growth rate of social financing stock in April dropped to 8.3%, down from 8.7% previously. The high prosperity of the financial industry in December may indicate that the growth rate of social financing remains stable.

3 ) Various transportation activities show high growth, which may impact exports. According to the PMI interpretation, "In December 2024, the business activity index for railway transportation, air transportation, and postal services all showed a significant increase compared to the previous month, with all indices above 55%." Attention should be paid to the impact of export rush on transportation activities. From the high-frequency data in December, the traffic volume of freight trucks on highways, port cargo throughput, port container throughput, freight flight frequency, and international freight flight frequency in December all showed significant improvement compared to November. From the PMI new export orders, the new export orders index is at 48.3%, an increase of 0.2 percentage points from the previous month, rising for two consecutive months. "Among them, the new export orders index for consumer goods manufacturing also rose by more than 2 percentage points from the previous month to above 50%, indicating a rebound in consumer goods exports in December."

II. Data: Manufacturing PMI Slightly Declines

The manufacturing PMI for December is 50.1%, down from 50.3% previously. Looking at the specific sub-items: 1) The PMI production index is 52.1%, down from 52.4%, a decrease of 0.3 percentage points. 2 ) The PMI new orders index is 51.0%, up from 50.8%. The PMI new export orders index is 48.3%, up from 48.1%. 3) The PMI employment index is 48.1%, down from 48.2%. 4) The supplier delivery time index is 50.9%, up from 50.2%. 5) The PMI raw material inventory index is 48.3%, up from 48.2%.

Other important sub-items: 1 ) Prices: The price index has declined. In December, the main raw material purchase price index and the factory price index were 48.2% and 46.7%, respectively, down 1.6 and 1.0 percentage points from the previous month The overall level of market prices in the manufacturing sector has declined. According to the China Federation of Logistics and Purchasing (CFLP), "From the changes in market prices across the four major industries, the accelerated decline in basic raw material prices is the root cause of the overall downward trend in manufacturing prices. The purchasing price index and the factory price index for the basic raw materials industry are 45.6% and 43.2%, respectively, both down about 3 percentage points from last month. Overall, although the continuous decline in raw material prices has somewhat alleviated the cost pressure on enterprises, it also reflects that the momentum for economic recovery is still under pressure."

2) Inventory: Active procurement, inventory index slightly rebounded. In December, the purchasing index was 51.5%, higher than the previous value of 51.0%, remaining above the threshold for two consecutive months. The raw material inventory index was 48.3%, slightly higher than the previous value of 48.2%. The order backlog index was 45.9%, higher than the previous value of 45.6%. The finished goods inventory index was 47.9%, higher than the previous value of 47.4%.

3) Foreign Trade: New export orders index slightly rebounded. In December, the new export orders index was 48.3%, compared to the previous value of 48.1%. In terms of overseas conditions, the PMI for the Eurozone in December was 45.2%, unchanged from the previous value.

4) Construction Industry: In December, the business activity index for the construction industry was 53.2%, an increase of 3.5 percentage points from last month. According to the CFLP, “By industry, the business activity indices for the housing construction and civil engineering sectors are both above 52%, indicating that both the delivery of housing and infrastructure activities are improving. At the same time, there have been positive changes on the demand side, with the new orders index for the construction industry at 51.4%, marking the first rise above 50% since January 2024. By industry, the new orders index for housing construction has risen above 50%, and the new orders index for civil engineering has risen above 53%, indicating that the foundation for investment-related demand has been solidified, providing strong momentum for future development.”**

5) Service Industry: In December, the business activity index for the service industry was 52.0%, an increase of 1.9 percentage points from last month, reaching the highest point since April. According to the CFLP, “In December 2024, consumer-related activities experienced varying degrees of recovery after last month's off-season adjustment. Among them, the business activity index for retail has risen above 50%, while the indices for accommodation, catering, and cultural and entertainment industries, although still below 50%, have all seen varying degrees of increase from last month. In December 2024, the business activity indices for railway transport, air transport, and postal services have all shown significant increases from last month, with indices all above 55%, indicating that as the year-end approaches, business interactions among enterprises and social interactions among residents are becoming more active. In December 2024, the business activity index and new orders index for the financial industry have both achieved two consecutive months of month-on-month increases, with both indices above 60%.** 6 ) Expectations: Non-manufacturing expectations have rebounded. In December, the manufacturing production and business activity expectation index was 53.3%, down from 54.7% previously. The construction business activity expectation index was 57.1%, up from 55.6% previously. The service industry business activity expectation index was 57.6%, up from 57.3% previously.

7 ) Comprehensive output: In December, the comprehensive PMI output index was 52.2%, an increase of 1.4 percentage points from the previous month, indicating that the overall expansion of production and business activities of enterprises in our country has accelerated. The manufacturing production index and the non-manufacturing business activity index that make up the comprehensive PMI output index were 52.1% and 52.2%, respectively.

Author: Zhang Yu (S0360518090001), Lu Yinbo, Source: Yi Yu Zhong De, Original Title: "Dissecting Two Anomalies - December PMI Data Commentary," content has been edited.

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