The recovery in Australia's manufacturing sector lost momentum in May

(Photo by Rusty Jarrett/Getty Images)

Activity levels across Australia’s manufacturing sector continued to improve in May, albeit at a slower pace than April.

The latest Performance of Manufacturing Index (PMI) released by the Ai Group fell 4.4 points to 54.8, the lowest reading since January this year.

The PMI measures 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.

At 54.8, that indicates that while activity levels improved again in May, it was at a slower pace than the previous month.

Still, as the chart below shows, conditions across the sector have been improving for some time now.

“Manufacturers reported slower conditions than previous months, although demand is still relatively elevated,” the Ai Group said following the release of the report, noting that firms indicated that exports remained a key source of growth.

However, it wasn’t all good news.

“Less positively, others are feeling the impacts of the exiting auto industry more acutely”, the group said.

“Strong overseas competition remains evident and the Federal Budget has caused some unease. Slower retail conditions are also having some negative impacts for manufacturers, while slow capital expenditure by business is limiting demand for others.”

It also said that elevated input costs, along with shortages of specialised labour, were also negatives cited by firms.

Like the decline in the headline PMI, all of the reports activity subindices also weakened, although all continued to grow from a month earlier.

This table from the Ai Group shows the performance over the month.

Source: Ai Group

“New orders remained elevated (58.1 points), suggesting the current expansion has some way to run,” the group said.

“Employment (54.2 points), deliveries (55.8 points) and sales (54.4 points) remained relatively strong. Exports (52.0 points) slowed but remained expansionary, as did production (52.2 points) and stocks (50.9 points).”

Indicating that the ongoing improvement across the sector is broad-based, it also said that seven of the eight sectors monitored saw activity levels grow in May. The one exception was the textiles, clothing and other manufacturing sub-sector where activity levels contracted sharply.

While Innes Willox, CEO of the Ai Group, was largely impressed with the May report, noting that demand is relatively elevated for most sub-sectors while employment, sales and new orders continuing to grow, he said that weaker conditions in the retail sector remain a concern.

“Less positively, slower local retail conditions are having some negative impacts for manufacturers,” he said.

That’s a view that fits with recent retail sales and spending figures, increasing anxiety over the health of household finances.

Attention will now turn to the Ai Group’s services and construction PMI reports released next week to see whether the improvement in manufacturing has been replicated in the larger, and more economically important, parts of the economy.

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