Australia's manufacturing sector just suddenly went into reverse

Photo: iStock.

After 13 months of constant improvement, activity levels across Australia’s manufacturing sector came to a shuddering halt in August.

The Ai Group’s manufacturing Purchasing Managers Index (PMI) plummeted 9.5 points to 46.9, marking the first deterioration in activity levels seen since June 2015.

It was the largest one-month decline in the history of the survey.

Like those in other countries, the PMI measures changes in activity levels from one month to the next. Anything above 50 signals growth, while anything below that level means contraction -— so the higher the number the better.

At 46.9, the PMI for August signals a moderate contraction in overall activity levels.

It also saw the survey’s three-month moving average — a better gauge on the overall trend — fall from 53.1 to 51.7.

Like the collapse in the headline index, the survey’s components were anything but impressive with every single subindex deteriorating from levels seen in July.

Only the new orders component held above the 50 level that signals an expansion while measures on production, employment, inventories, sales, exports and deliveries all fell by between 0.8 to 16.4 points, leaving them in contractionary territory.

Ouch.

The table below from the Ai Group tells the story. There’s a lot of unwelcome red scattered across each and every category. The Ai Group uses three-month moving averages for the subindices to smooth out month-to-month volatility, not that it made much of a difference in August.

While the activity subindices were unilaterally weak, indicating that the weakness was narrow in scope, the Ai Group notes that activity levels actually expanded in five of the eight manufacturing sectors surveyed using three-month moving averages.

“The best expansion was in printing and recorded media (63.6 points), followed by metal products (55.9 points), petroleum, coal and chemical products (54.8 points), non-metallic mineral products (53.6 points) and wood and paper products (52.0 points),” it said.

“The food & beverages sub-sector slipped into contraction (48.7 points), while textiles and clothing (46.3 points) and machinery and equipment (48.2 points) remained in contraction for the month.”

The group suggested that the recent federal election and weakness in the nation’s mining and dairy industries may have played a part in the weak August result.

“Comments from manufacturers in August indicate patchy conditions, with lower ordering activity and exports for the month. Input prices continue to climb and some weakness in the mining and agricultural (dairy) industries are flowing through to manufacturers,” said the group.

“Some manufacturers stated that reductions in government spending (Federal and State) has been dampening activity, while others noted a lingering lack of confidence (post-election) was keeping a lid on activity for them.”

Let’s hope that August was an anomaly, rather than the start of a longer-lasting trend.

Upcoming services and construction PMI’s for Australia — due early next week and representative of the vast bulk of Australian economy — have just taken on an increased significance.

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