PMI Is Up: At Least One Big Aussie Economic Indicator Has Dragged Itself Out Of The Doldrums

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Great news this morning for the Australian economy and something that the men and women of the RBA will welcome warmly at their board meeting this morning.

The Australian Industry Group’s (AiG) Performance of Manufacturing Index has been released for September and it showed a big jump of 5.3 points back into expansion territory at 51.7.

When evaluating surveys like this and the NAB Business Survey it is always best to look through the headline into the sub indices and into participant responses to get a feel for what is really going on underneath the headline number.

So the feedback that participants are genrally looking up is good news for the economy with the key drivers being,

(1) a lower Australian dollar; (2) lower interest rates; and (3) the recent Federal election are showing through in improved sentiment and actual orders from Australian-based customers. Businesses said this improvement is so far weak but still noticeable. They also noted however, that new orders are still declining from mining industry customers and from the public sector.

Clearly the economy still needs to transition from mining but this release is very welcome news on that front. But some might argue that the transition is not assured though as the strength in the sub-sectors is strongest in food, beverages and tobacco but metal products and machinery and equipment sub-sectors show “severe contraction”. On the other hand however where else are Australian households going to start to free up their wallets other than the subsectors that are benefiting, and the fall in the Aussie dollar will give us a J-curve effect in time but it’s not instantaneous.

Innes Wilcox the Chief Executive of the AiG was naturally effusive about this release but the really exciting thing for the Australian economy – even though this is one number amongst many that have been poor recently were his comments that:

The lift in the sector’s performance in September was more evident in forward-pointing indicators such as supplier deliveries and new orders rather than in current-period indicators such as production, employment and exports which continued to contract or were flat at best. The key question is whether these tentative pointers to future growth are confirmed by further gains in manufacturing performance over the next few months.

One swallow doesn’t make a summer and one good PMI report doesn’t make a recovery in Australian manufacturing but this is unequivocal good news regardless.

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