The recovery in Australia's manufacturing is slowing

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Activity levels across Australia’s manufacturing sector slowed noticeably at the start of 2017, according to the latest purchasing managers index (PMI) released by the Ai Group on Wednesday.

The headline PMI fell by 4.2 points to 51.2 in January, marking the first time in five months that the index failed to increase.

The PMI measures changes in activity levels across Australia’s manufacturing sector from one month to the next. It ranges from a score of 0 to 100, with 50 deemed neutral. Anything above 50 indicates that activity levels improved, while a reading below 50 suggests activity levels declined.

So, despite the monthly pullback in the PMI in January, activity levels continued to improve, albeit at a slightly slower pace.

Not terrible news by any measure, but certainly not spectacular.

Breaking down the January report, the internals were slightly disappointing, particularly given the strength reported in Decemmber, with production levels remaining largely unchanged while supplier deliveries, employment and sales all fell.

Exports also grew at a far slower pace while new orders — a lead indicator on future activity levels — also decelerated sharply.

“Comments from manufacturers in January show new orders are picking up across many sub-sectors at the start of the year,” said the Ai Group. “While demand appears to be patchy, some construction projects are helping activity and pockets of growth in agriculture and mining are lifting activity for manufacturers.”

Inventory levels expanded at a faster pace, a result perhaps driven by recent strength in production levels. It could also be a sign that end demand for Australian manufactured goods is waning.

“Inventories look to have built up for most manufacturers and this may impact production in coming months,” the Ai Group said.

There was some good news, however, with capacity utilisation picking up smartly while both input and output prices increased, suggesting that inflationary pressures in the sector are building.

This table from the Ai Group shows the movements of the survey’s internal components in January.

Source: Ai Group

Like the moves seen in the various activity subindices, the performance of individual sectors were also patchy with four sectors expanding, two remaining steady while two contracted in trend terms.

Food and beverages (53.9 points) and petroleum and chemical products (53.5 points) continue to grow albeit at a slower pace,” said the Ai Group.

“Non-metallic mineral products (65.9 points) and machinery and equipment (57.5 points) expanded at a quicker pace, while wood and paper products (50.5 points) and metals products (49.9 points) improved to more stable conditions.”

Textiles and clothing, along with printing and recorded media, both saw activity levels deteriorate, especially the latter.

Following the release of the manufacturing PMI report, attention will now turn to the release of activity gauges from Australia’s services and construction sectors in the coming days — far larger components within the Australian economy — to see whether the positive momentum see late last year continued at the start of 2017.

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