Australia's manufacturing sector is ramping up

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Activity levels across Australia’s manufacturing sector continue to strengthen, and rapidly.

The latest manufacturing Purchasing Managers Index (PMI) released by the Ai Group came in at 57.5 in March, down fractionally on the 15-year high of 59.3 reported in February.

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 while the pace of improvement in March was slower than February, it still points to a rapid recovery in activity levels across the sector.

As a result of strength in the PMI since the beginning of the year, the survey’s three-month moving average — a better overall guide to the trend in activity levels — rose to 56 points, the highest level since December 2002.

A pleasing result, even if it the sector is now a far smaller proportion of the Australian economy than what it once was.

And, adding to the strength in the headline PMI, the Ai Group said that all seven of the survey’s activity subindices improved in March.

“Expansions in new orders (62.6 points) and sales (57.7 points) strengthened,” it said.

“Production expanded while slowing from more robust growth last month (57.6 points) as did employment (54.1 points). Deliveries (52.9 points) and exports (51.1 points) eased to more modest growth, while inventories turned up in March (55.5 points).”

These figures are seasonally adjusted by the group and, like the headline PMI, a reading above 50 indicates that they improved.

The strength in the new orders subindex — a lead indicator on future activity levels — was particularly pleasing, suggesting that the strength of March is likely to continue into April, and perhaps beyond.

This table from the Ai Group shows how each individual subindex performed in March.

Source: Ai Group

By individual subsector, the group said that five of eight saw activity levels improve during the month, including the enormous food and beverages sector, the largest in the country.

“The strongest growth was in non-metallic mineral products (64.8 points) and food and beverages (63.4 points),” it said.

“Encouragingly, metals products (59.5 points) and machinery and equipment (60.5 points) strengthened in March, despite the ongoing exit of automotive assembly, which is included in machinery and equipment.

Textiles and clothing, at 45.2, along with printing and recorded media at 48.5, were the only sectors that reported a decline in overall activity levels.

While not all sectors enjoyed a strong month in March, in more broader terms, the Ai Group said the robust result indicates that demand continues to recover.

Positive factors for demand include higher prices for coal and other commodities, large infrastructure projects, the NBN rollout, and stronger defence spending and stronger activity in the agricultural sector,” it said.

However, partially offsetting those positives, it said that energy prices, particularly for electricity, “continue to play havoc with manufacturers”.

“Concerns about energy pricing and security of supply are eroding profitability and confidence,” it said.

After another strong showing in March, markets will now await the release of services and construction PMI reports from the Ai Group later this week to see whether the strength in manufacturing has been replicated in the larger, and more economically important, parts of the Australian economy.

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