Australia's manufacturing sector is booming

Photo: Andrew Burton/ Getty Images.

Australia’s manufacturing sector is humming, expanding at the fastest pace in 15 years in August.

The latest Manufacturing Purchasing Mangers Index (PMI) from the Ai Group jumped by 3.8 points to 59.8, leaving it at the highest level since May 2002.

The PMI measures 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 59.8, that indicates that activity levels not only improved in August, they did so at a fastest pace in 15 years.

Activity levels have now improved in each of the past 11 months.

That’s yet another sign that the Australian economy is strengthening, and fits with the strong business capital expenditure report released by the ABS earlier this week. Operating conditions are booming across the sector, and it’s encouraging firms to invest.

“The alignment of the stars continued for domestic manufacturing with the PMI indicating a very strong performance in August,” said Innes Willox, CEO at the Ai Group.

Fitting with the strong headline reading, the internals were also robust with six of the seven activity subindices improving during the month.

Source: Ai Group

“Production and new orders were especially strong, but they were coupled with a robust expansion in inventories rather than in sales,” the Ai Group said. “This suggests current activity is geared towards future orders and stockpiling rather than for immediate delivery.”

Elsewhere hiring and supplier deliveries grew at a slightly slower pace than July, while exports were largely unchanged from one month earlier.

The weakness in the latter suggests the elevated Australian dollar may now be crimping foreign demand, and will need to be closely monitored in the months ahead.

As the Reserve Bank of Australia has previously warned, a higher currency risked “complicating” Australia’s economic rebalancing. This is an early sign that’s taking place.

However, one month does not make a trend, and the surge in new orders — leaving it at the highest level since May 2002 — suggests that domestic demand will help to support activity levels across the sector in the latter parts of the year.

Adding to the bullish August report, the Ai Group said the improvement in activity levels was broad based with seven of eight sectors expanding over the month.

“Non-metallic mineral products and wood and paper products expanded very strongly in August due to local demand from the building industry and from food manufacturing and processing,” the Ai Group said.

“Positive sources of local demand for manufacturers of chemicals, metals, machinery and equipment included infrastructure construction, mining, agriculture, renewables and water utilities.”

While clearly a bullish report on the health of Australia’s manufacturing sector, firms noted that higher energy costs and the stronger Australian dollar remained a “great concern”.

Following the release of today’s report, market attention will now turn to the release of services and construction PMIs from the Ai Group early next week to determine whether the improvement in the manufacturing sector has been mirrored in other parts of the economy.

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