- Activity levels in Australia’s manufacturing sector have been improving for over a year
- Lead indicators suggest the positive momentum will likely continue in the months ahead
- Reports of skill shortages bode well on the outlook for wage growth
Activity levels across Australia’s manufacturing sector continued to improve in February, continuing to build on the positive momentum seen over the past year.
The Ai Group’s Performance of Manufacturing Index (PMI) came in at 57.5 points in February in seasonally adjusted terms, down 1.2 points from the level reported in January.
This index measures perceived changes in activity levels across Australia’s manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.
So at 57.5, January’s reading indicates that activity levels improved last month, just at a slower pace than January.
Activity has now been steady or improving in each of the past 17 months, the longest stretch of expansion since 2005.
Adding to the positive headline reading, the Ai Group said all of the seven activity subindexes contained in the report improved in February.
“This marks a fourth consecutive month in which all seven activity sub-indexes have expanded,” the group said.
“Five of the seven activity indexes slowed in February, however, with only the employment and exports sub-indexes accelerating.”
This table from the Ai Group shows how each subindex fared in February compared to January and the average seen over the past 12 months.
Unlike the headline PMI, these are measured in trend terms to smooth out volatility seen month-to-month.
While the majority of subindexes improved at a slower pace than January, all remain well above the 50 level that indicates no change in activity levels.
At 55.4 and 56.5 respectively, the new order and export figures bode well for Australia’s manufacturing sector in the months ahead given they are deemed to be lead indicators.
“New orders were particularly strong [for building materials], indicating further expansion is likely for this sub-sector in 2018,” the Ai Group said.
“Participants reported improved exports to the United States and Asia in February.”
The employment index also suggests that staffing levels continued to grow strongly last month, suggesting that the strength in employment growth in 2017 has continued into early 2018, at least among manufacturing firms.
And there was also good news on the outlook for wage growth with a greater number of firms reporting difficulty in obtaining suitably skilled staff.
“Labour and skill shortages are arising as issues for more manufacturers in 2018,” the Ai Group said.
“Some participants reported increased reliance on overtime to cover higher than usual activity over recent months.”
It added that “many manufacturers are now looking to employ more staff but are finding it difficult to find skilled workers for their locations or specialisations”.
Like the activity subindexes, the Ai Group said the majority of manufacturing subsectors also saw activity levels improves in February, indicating that the strength in the headline reading was broad-based.
“Six of the eight sub-sectors expanded in February and two contracted,” it said.
“The larger manufacturing sub-sectors are continuing to see a sustained period of expansion or recovery, with six sub-sectors indicating expanding conditions since at least January 2017.”
Following the release of the Ai Group’s manufacturing PMI, markets will receive separate reports on the performance of Australia’s services and construction sectors — far larger sectors within the Australian economy — in February early next week.