Australia's manufacturing sector cooled in May

Conditions across Australia’s manufacturing sector improved at a slower pace in May, according to the Ai Group’s manufacturing purchasing managers’ index (PMI) released on Wednesday.

The headline PMI came in at 51.0, down 2.4 points from April. Despite the fall, the series three-month moving average — a better guide as to the overall trend in manufacturing conditions — held at levels not seen since 2010.

A PMI gauge measures changes in activity levels from from month to the next. A reading above 50 indicates that activity levels are growing while a reading below 50 points to a contraction — so the higher the number the better.

At 51.0, it indicates that growth across the sector slowed sharply in May. While the eleventh monthly expansion in a row — the longest period of uninterrupted growth since September 2006 — it was the lowest level seen since October last year.

A loss of momentum, in other words.

Fitting with the decline in the headline index, six of the surveys seven components deteriorated during the month although most remained in expansionary territory.

The table below, supplied by the Ai Group, reveals the internal movements within the survey in May. The group uses three-month moving averages for the subindices to eliminate month to month volatility.

Of note, readings on employment, exports and production slumped, falling to 45.6, 51.2 and 50.9 points respectively. New orders bucked the trend, rising 0.1 points to 52.2, a good sign as this is regarded as a forward indicator on future levels of activity.

Outside of the headline subindices, there were also some hefty increases in prices and wage growth, indicating that inflationary pressures are building, at least in the manufacturing sector.

Capacity utilisation also firmed to 75.4%, adding to signs that price pressures may be building.

By individual sector, the Ai Group notes that activity levels expanded in five of the eight group’s surveyed with the strongest growth recorded in the beverage/tobacco and wood/paper products industries. At the other end of the spectrum, metal products manufacturers continued to languish in contractionary territory, sitting at 44.1.

Despite the disappointing headline PMI figure, Innes Willox, CEO of the Ai Group, believes that the positives are outweighing the negatives at present.

“Australian manufacturing is recovering in 2016 in response to the lower dollar, but it is also rebalancing in response to changes in global production and consumption trends,” said Willox following the release of the May report.

“We are seeing an increasing focus on consumable goods such as food, groceries and health products as well as building materials for the construction industry. We are still seeing contraction, however, in the heavy industrials categories and especially in metals and some types of machinery and equipment manufacturing such as automotive production.

“On balance, the positives are outweighing the negatives at present,” he added.

In the coming days the group will release PMI reports for Australia’s services and construction sectors, something that will watched closely by investors given they make up more than 90% of the Australian economy.

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