Australia's manufacturing sector is showing signs of life

‘The Blue Universe’. Picture: Hiroki Kondo

For a fifth consecutive month activity levels across Australia’s manufacturing sector have expanded, marking the longest stretch of gains seen since July 2010.

The latest manufacturing PMI report released by the AiGroup rose 2.3 points to 52.5 in November, leaving the index at the highest level seen since October 2013.

The survey’s three-month rolling average, a better gauge on the overall trend in activity levels, rose to 51.6, the highest level seen since August 2010.

PMI reports are diffusion indices that measure monthly changes in activity levels. A reading above 50 suggests activity levels are expanding with a reading below 50 signalling contraction.

At 51.6, the three-month trend indicates that activity levels are now expanding, a significant improvement in the 46.6 level seen in April this year.

“Improvements in sales, exports, production, new orders and employment underwrote another stronger manufacturing performance in November,” said Innes Willox, chief executive at the Ai Group.

“The more positive conditions are due to the more competitive level of the Australian dollar, the considerable cost savings and other efficiencies that manufacturers have introduced over recent years and continuing strong demand from residential construction businesses.”

Five of the eight specific sub-sectors expanded with wood & paper products, textiles, clothing, footwear, furniture and other, petroleum, coal, chemical & rubber products, nonmetallic mineral products and food and beverages all recording activity levels above the 50 threshold that separates expansion from contraction.

Machinery and equipment, metal products and very small printing & recorded media remained in contractionary territory.

While the performance across the various industry specific sectors was mixed, there was better news on the survey’s individual activity gauges, with only inventories contacting during the month.

New orders rose 3.3 points to 53.2 while sales jumped 4.5 points to 53.6. Production expanded for a fifth month, rising 2.6 points to 53.0, while supplier deliveries increased 3.7 points to 55.0. Reflective of the weaker Australian dollar, the exports subindex rose by a further 1.4 points to 56.4.

The manufacturing employment sub-index also improved, rising 2.4 points to 51.7 after a brief and mild decline in October.

Although Australia’s manufacturing sector is now far less influential that what it once was, it is encouraging to see activity levels continuing to improve given the sector was mired in contractionary territory for much of the past two years.

With the lower Australian dollar now acting as a tailwind for non-mining sectors of the economy, many will be hoping that the resilience seen in the manufacturing PMI survey will be replicated in the larger, and significantly more influential, services PMI report released on Thursday.

A sustained improvement in that gauge will not only bode well for the domestic labour market outlook but also Australia’s economic transition as a whole.

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