It may be small, but Australia's manufacturing sector is looking mighty

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While there is little doubt that Australia’s manufacturing sector is now far smaller than what it once was, those who remain are doing more than alright at present.

This is no better demonstrated than in the latest manufacturing purchasing managers’ index (PMI), released by the Ai Group today.

In July the index surged by 4.6 points to 56.4, leaving it at the highest level since March this year.

Like those in other nation’s, 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 56.4, it suggests activity levels are growing strongly. It’s not a bad performance all things considered, particularly given where the index was languishing in previous years.

Perhaps the best way to describe Australia’s manufacturing sector at present is “small but mighty”.

According to the Ai Group, the July result continued “a recovery in the manufacturing sector that has now been running for thirteen months, marking the longest growth phase for the sector in well over a decade”.

It also acknowledged that the resilience was assisted by a more competitive Australian dollar, along with certainty brought about by the end of the federal election.

Breaking down the July report, the internals largely mirrored the strength of the headline index with most subindices recording strong improvements from June.

Of note, the index measuring sales jumped to 59.8, marking the fastest increase seen since September 2009. There was also good news when it came to new export orders with the subindex surging to 59.5, the highest level seen since March 2008. That’s pre-GFC territory.

Like the new exports figure, the new orders subindex also improved, increasing by 4.7 points to 58.8. As a lead indicator, this suggests that activity levels may improve even further in the months ahead.

The deliveries subindex also jumped by 13.7 points to 62.6, the highest level seen in the history of the survey.

“Together with the stronger new orders sub-index, this suggests manufacturers may be gearing up for more production,” said the Ai Group.

Perhaps as a result of the surge in new demand, the surveys employment subindex rocketed to 56.5, an increase of 8.6 points on June. It now sits at the highest level seen since December 2004. Putting that another way, manufacturers added staff at the fastest pace seen in well over a decade.

The chart below, supplied by the Ai Group, reveals the internal movements of the subindices, comparing the results to both June and the levels of a year earlier.

With the exception of production and inventories, all components strengthened in July.

Like the subindices, the performance across individual sectors also impressed with six of eight seeing activity levels expand in July, led by wood and paper products which accelerated to 59.6.

Food, beverages and tobacco — the largest manufacturing sector in the country — saw growth slow fractionally over the month, falling one point to 52.7.

Innes Willox, CEO of the Ai Group, offered cautious optimism to the July result, suggesting that while the near-term outlook appears robust, it is largely recouping declines seen in the years following the global financial crisis.

“The strong lift in new orders augers well for the sector’s immediate outlook and for a continuation of the role manufacturing is playing in the rebalancing of the broader economy,” said Willox.

“However, the expansion over the past year has been only a partial recovery from the very serious slump in the years following the global financial crisis.

“Further substantial gains in manufacturing will require a lift in business investment both within the sector and across the broader economy,” he added.

Later this week the Ai Group will release separate PMI gauges covering Australia’s services and construction sectors. Both saw activity levels improve in June compared to May, providing further evidence that Australia’s economic transition was gaining traction.

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