Australia's manufacturing sector continues to produce the goods

Oli Scarff/Getty ImagesHmmm. Beer.
  • Activity levels across Australia’s manufacturing sector improved for a 21st consecutive month in June.
  • New orders continue to grow, potentially placing upward pressure on demand for workers and new investment.
  • Margin pressures are increasing for some sub-sectors, partially as a result of drought conditions in many parts of the country.

Activity levels across Australia’s manufacturing sector continued to improve in June, adding to the positive momentum enjoyed in the prior 20 months.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) came in at 57.4 in seasonally adjusted terms, pulling back slightly from 57.5 in May.

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 57.4, activity levels continued to improve at a decent clip in June, just fractionally slower than May.

Activity has now improved in each of the past 21 months, the longest stretch of continuous growth since 2005.

Mirroring the headline PMI, the Ai Group said a majority of the surveys activity subindexes continued strengthen in June.

Six of the seven activity sub-indexes indicated expansion in June, with only the finished stocks sub-index remaining stable,” it said.

“The new orders sub-index fell in June but remains expansionary, indicating a strong likelihood of further near-term manufacturing growth. This is despite some participants citing a reduction in new orders due to the approaching end of the financial year.”

The new orders index is seen to be a lead indicator on how activity levels are likely to evolve in the months ahead.

Ai Group

With production, exports and sales all continuing to improve, manufacturers indicated that they stepped up hiring levels during the month, fitting with official labour market data released by the ABS.

“The employment sub-index remains buoyant and has indicated stable or expanding conditions since late 2016,” the Ai Group said.

“ABS employment data indicate manufacturing employment is at its highest level since August 2012.”

In what is a good sign on the outlook for investment, capacity utilisation across the sector also improved, lifting by three percentage points to 79.1%.

“This is well above the historical average of 73.1%, suggesting more businesses have low spare capacity,” the Ai Group said.

Adding to the positive report card, all bar one sub-sector — textiles, clothing, furniture and other manufacturing — recorded an improvement in activity levels from May.

“Seven of the eight sub-sectors expanded in June,” the group said.

“Sub-sectors that provide manufactured goods for civil engineering, residential, and commercial construction projects continue to report very strong levels of activity.”

While a strong result, the one main area of concern in the June report came from increased margin pressures.

Input prices rose substantially faster than selling prices, driven in part by drought conditions in many parts of the country.

“Drought conditions are now having an adverse impact on manufacturers linked to the agricultural sector, particularly those operating in the food and beverages, metals and machinery and equipment sub-sectors,” the Ai Group said.

While that’s something that will be watched closely in the months ahead, the June report suggests conditions across the sector are buoyant, particularly from a demand perspective.

Following the release of the manufacturing PMI today, markets now await the arrivals of separate activity indicators for Australia’s services and construction sectors in the days ahead.

The Ai Group measures have been robust over the past year, fitting with the view that conditions are continuing to strengthen across the broader Australian economy.

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