New PMI data from the Commonwealth Bank suggests that Australia's economy is strengthening

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New manufacturing and services PMI data from the Commonwealth Bank shows that both sectors maintained a solid rate of activity in June.

With PMI data rolling out globally at the start of a new month, the Commonwealth Bank has this morning introduced its own release of monthly PMI indicators, in conjunction with IHS Markit Services.

“The PMI surveys cover senior purchasing managers in 400 Australian companies in the manufacturing and service sectors each month,” the bank said. The survey began in May 2016.

According to CBA chief economist Michael Blythe, “the monthly Purchasing Managers Index (PMI) readings will account for nearly three-quarters of the economy (manufacturing 6% of GDP and services 67% of GDP). The focus on business conditions rather than sentiment means the PMI’s will provide timely updates on what is actually happening in the Australian economy”.

The Commonwealth Bank’s first publicly released PMI readings paint a somewhat bullish picture, with both manufacturing and services expanding in June.

The figures show a reading of 56.2 for the manufacturing index, and an even stronger reading of 57.0 for the services sector.

PMI readings range 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.

Gains in the manufacturing sector were driven by a rise in output and new orders, which are the two biggest components of the index:

Commonwealth Bank of Australia

“Production was expanded to the greatest degree of 2017 so far, while new work rose at the strongest rate since March,” Commonwealth Bank said.

There was also a rise in export orders with continued demand from Asia, while the buildup of work outstanding increased which suggests that the industry is operating near capacity.

Both the manufacturing and services PMI indexes also include a reading of outlook over the next 12 months.

“Manufacturers were also confident that production would increase in the next 12 months, with around two-thirds of respondents expecting to raise output,” the bank said.

The positive projections for growth meant that manufacturers were maintaining their rate of new orders, which in turn is pushing up the rate of purchasing cost inflation.

“The pressure on capacity evident in the survey responses is a positive indication for further jobs growth and brings us a step closer to the long-awaited lift in business capex,” Blythe said.

Commonwealth Bank of Australia

There were similar levels of improvement and optimisim reported in Australia’s services sector, with the June reading of 57.0 recording a notable rise from 54.8 in May.

“The Services PMI covers industry subsectors including transport & storage, consumer services, information & communication, finance & insurance and real estate & business services,” Commonwealth Bank said. It doesn’t include the retail sector or wholesalers.

Commonwealth Bank of Australia

“A combination of improved marketing and greater demand were reported to have underpinned growth of activity,” Commonwealth Bank said.

According to CBA, the improved market conditions are pushing Australia’s services sector towards capacity. A backlog of work remains and companies were hiring where possible, with skills shortages in the industry helping to push up wage-growth input costs in June.

Upwards pressure on wages would come as a welcome relief for both Australian workers and policy makers, with private sector wage growth consistently stuck at record low levels.

Despite a reported rise in wages and also prices charged by suppliers, CBA said that the rate of input cost inflation in the services sector was the lowest since the survey started being recorded in May 2016.

“A pick up in wages growth from current very low rates would help the key consumer part of the Australian economy. These pressures are yet to show in output prices. But it adds to other signals warning that our very benign inflation backdrop will not continue indefinitely,” Blythe said.

Similar to manufacturing, the companies surveyed from the services sector were positive about the economic outlook, with 70% of respondents forecasting growth over the next 12 months.

Commonwealth Bank of Australia

The strong readings across both indexes led to a rise in the composite index, which increased to 57.2 from 55.2 in May.

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