Manufacturing activity agonisingly close to expansion

A positive result for both production and new orders helped push manufacturing activity further out of the doldrums in July, according to the BNZ Capital - Business NZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for July stood at 49.7. This was up 3.2 points from June, and followed an identical improvement from May to June. The last time activity was higher than July 2009 was April 2008 (50.9).

A PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining. PMI values for July in the years 2003-2008 ranged from 48.1 to 58.8, with an average score for the previous July results of 52.7.

Business NZ Chief Executive Phil O’Reilly said that the positive results for key sub-indicators provide a much stronger base for further improvement in the sector.

“If manufacturing is to move into expansionary territory, production and new orders must continue to show solid and ongoing improvements. The values for both these indices in July means that New Zealand is agonisingly close to breaking 15 months of contraction in a sector that is often the first to fall into recession, but often the first to come out of it.

“While the result is very encouraging and almost identical to manufacturing developments offshore, the next significant development for sustained expansion needs to come from improvements in numbers employed in the sector, which is still some way off a recovery. Also, although comments from respondents highlight increased offshore orders, the continued upwards swing of the New Zealand dollar against the USA dollar will cause growing concern amongst some manufacturers if current trends continue.”

BNZ Capital Head of Research Stephen Toplis said the fact that improvements in PMIs is a relatively widespread phenomenon around the world – including the UK, US, Europe and China – is growing confirmation that the worst is probably over.

“It’s therefore not surprising that equities, commodities and commodity currencies are all currently in the ascendancy. However, for New Zealand this is a double edged sword. An improvement in demand will be highly beneficial but competitiveness will face headwinds to the extent that the NZD finds further support. That said, a strong global economy and a strong NZD are preferable to weakness in both.”

While three of the five seasonally adjusted main diffusion indices continued to display contraction, the two key indicators of production (51.0) and new orders (55.1) both showed expansion. The lift in production meant it recorded its highest value since April 2008, while new orders displayed its highest value since December 2007. Employment (44.0) showed some improvement from June, while deliveries of raw materials (47.6) lifted from three close results ranging from 43.0-43.5. Finished stocks (42.8) decreased another 1.2 points from June to reach its third consecutive new low since the survey began.

Unadjusted activity for June showed more encouraging signs for most parts of the country. The Northern region (47.4) was up 5.7 points from June, and its highest result since August 2008. Both the Central (52.7) and Canterbury/Westland (54.9) regions experienced their highest level of activity since May and February 2008 respectively. With the former, it was only the second time in 20 months that any level of expansion had been recorded. The Otago/Southland region (39.8) remains in a volatile position, with a drop from 48.8 in June.

Click here to view the July PMI.

Click here to view the Time Series Data.

PMl results are available on www.businessnz.org.nz under ‘PMI Reports’. For more information or assistance with data interpretation, contact Stephen Summers, ph 04 4966564, ssummers@businessnz.org.nz. The BNZ Capital - Business NZ PMI (performance of manufacturing index) draws on the depth of member companies associated with Business NZ: Employers and Manufacturers Association (Northern), Employers and Manufacturers Association (Central), Canterbury Employers’ Chamber of Commerce and Otago Southland Employers Association. The survey is sponsored by Bank of New Zealand Ltd.