Manufacturing index shows hope despite continued contraction

THE manufacturing sector contracted at a slower rate in August with some improvements in the production, employment and new orders sub-indexes. 

The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI) was 4.4 points higher at 46.4 (readings below 50 indicate a contraction in activity). 

Despite the slight lift, August marks the 26th consecutive month of contraction, which is the longest period of contraction in the 21 year history of the Australian PMI.

Three sub-sectors grew in August with food, beverage & tobacco products recording the strongest reading (56.8 points in three month moving average terms) with a fall in the Australian dollar giving the sub-sector an apparent boost. 

In contrast, the lower dollar is having its expected negative impact on the prices of imported inputs with the input prices sub-index reaching its highest level (75.1 points) in more than two years.

The pace of contraction eased for new orders (44.3 points); employment (46.3 points) and particularly for manufacturing production, which rose by 9.4 points to 47.1 points in August.

Ai Group Chief Executive, Innes Willox, said: "There were mixed signals from manufacturers in August.  The fall in the value of the dollar is beginning to be felt, with some businesses reporting improved competitiveness against imports. 

However, exports continue to struggle, while the lower dollar is also pushing up average costs for non-labour inputs, many of which are imported.  The persistence of downwards pressure on selling prices indicates that manufacturers have little ability in these difficult market conditions to pass on these higher costs and take the pressure off their margins.

"The extent of the structural challenges facing manufacturers was underlined in August by the Australian PMI recording its 26th consecutive month of contraction and indicating 22 consecutive monthly falls in employment.  Of course, this is more than just a challenge for the industry itself; it is also exposing the broader economy to a risky imbalance," Mr Willox said.

Australian PMI: Key Findings for August:

  • The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) lifted 4.4 points to 46.4 points in August.  It remained below the 50 point expansion mark for a 26th consecutive month.
  • Local demand and new orders remains patchy with some growth spots emerging in NSW from new construction and essential maintenance contracts.
  • The fall in the Australian dollar has only made a slight improvement to overall exports so far (28.3 points) but has put further pressure on input prices (up 4.1 points to 75.1 points).
  • Three sub-sectors expanded in August (in three month moving average terms): food, beverage & tobacco products (56.8 points), petroleum, coal, chemical & rubber products (52.2 points) and printing & recorded media (50.1 points), up from just one sub-sector in July (food, beverages & tobacco).
  • Manufacturing production rose 9.4 points to 47.1 points - its strongest level since March 2012.
  • Around 10% of respondents said the upcoming federal election is creating uncertainty for the sector.

Report available at: PMI Report