Australia's manufacturing sector defied the drought and political chaos seen in August

CBS via Getty ImagesSmall but mighty, for now.
  • Activity levels across Australia’s manufacturing rebounded strongly in August despite political chaos in Canberra and the impact of a deepening drought across much of the eastern states.
  • New orders and new export orders both increased strongly, a good sign for activity level in the months ahead.
  • Margin pressures for manufacturers intensified during the month as input costs rose faster than selling prices.

Activity levels across Australia’s manufacturing rebounded strongly in August, a resilient performance given political chaos in Canberra and the impact of a deepening drought across much of the eastern states.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) rose to 56.7 points last month after seasonal adjustments, up 4.7 points on the level reported in July.

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

So at 56.7, activity levels not only improved in August but they did so at a faster pace than July.

Activity levels have now improved for 23 consecutive months, the longest stretch of continuous growth since 2005.

“The manufacturing sector has confounded doubters in recent years by lifting employment and production but significant headwinds from energy costs and more recently, drought conditions flowing along supply chains, continue to see input costs rise for manufacturers,” said Innes Willox, CEO at the Ai Group.

“Food and beverage manufacturers are reporting disrupted supply and higher prices for a range of agricultural inputs, while manufacturers operating in the metals and machinery and equipment sub-sectors who sell to the agricultural sector or its supply chain are reporting reduced sales.”

Like the improvement in the headline PMI, all of the survey’s seven activity subindexes improved last month, including the all important mew orders subindex, a lead indicator on activity levels in the months ahead.

Ai Group

“New orders rose 8.5 points to 59.6 points in August, signalling further growth in many parts of manufacturing in the coming months,” the Ai Group said.

The lower Australian dollar, now down over 11.5% against the greenback from the highs struck in January this year, may also be providing a tailwind for the sector with the new export subindex jumping 8.5 points to 58.4, signalling a sharp improvement from the levels reported in July.

Sales levels also rose sharply, jumping a mammoth 15.2 points to 60.7, recovering having contracted one month earlier.

Employment levels also increased, as did input prices, a result partially reflecting the impact of drought conditions for some manufacturing firms.

While all activity subindexes improved last month, selling prices rose slower than input prices, indicating increased margin pressures in some sub-sectors.

Capacity utilisation also eased to 77.5%, although that still remains well above the series long-run average of 73.2%.

In a sign that the improvement across the manufacturing sector is uneven in nature, the Ai Group said that just five of eight subsectors recorded an improvement in activity levels during August.

“Food and beverages, wood and paper products, chemicals, non-metallic minerals and machinery and equipment all remained expansionary in August,” it said.

“The small printing and recorded media and ‘textiles, clothing and other manufacturing’ sub-sectors contracted in July… [while] the metal products subsector was broadly stable at 49.3 points in August.”

Following the manufacturing PMI today, the Ai Group will release activity measures for Australia’s services and construction sectors — far larger parts of the Australian economy — in the days ahead.

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